SEBI Circular: Prudential Norms for Passive Schemes’ Exposure to Sponsor Group Companies

Securities and Exchange Board of India (SEBI) has issued a circular to streamline prudential norms for passive mutual fund schemes regarding their exposure to securities of group companies of the sponsor. This comes after a working group reviewed the current regulatory framework and recommended measures to promote ease of doing business for mutual funds. The SEBI (Mutual Fund) Regulations, 1996, have been amended to reflect these changes.

Under the new regulations, mutual fund schemes are restricted from investing more than 25% of their net assets in listed securities of sponsor group companies, with exceptions for equity-oriented exchange-traded funds (ETFs) and Index Funds. These exceptions allow investments according to the weightage of the underlying index constituents but cap the overall investment at 35% of the scheme’s net asset value. Widely tracked and non-bespoke indices, which serve as primary benchmarks for funds with collective assets under management (AUM) of INR 20,000 Cr. and above, are specified for these investments.

The list of such indices will be updated biannually based on the AUM threshold as of March 31st and September 30th, and published by the Association of Mutual Funds in India (AMFI) after SEBI approval. Passive schemes based on indices not included in this list must rebalance within 30 business days, with possible extensions up to 60 days if justified. If rebalancing does not occur within the extended timeline, asset management companies (AMCs) cannot launch new schemes until compliance is achieved and cannot levy exit loads on exiting investors.

This circular aims to protect investor interests and promote securities market development. It can be accessed on SEBI’s website under the “Legal -> Circulars” section. The list of specified indices as of June 30, 2024, includes major indices like Nifty 50, BSE SENSEX, and others.

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Securities and Exchange Board of India

Circular No. SEBI/HO/IMD/IMD-PoD-2/P/CIR/2024/098 Dated:  July 08, 2024

To
All Mutual Funds (MFs)/
All Asset Management Companies (AMCs)/
All Trustee Companies/ Board of Trustees of Mutual funds/
Association of Mutual Funds in India (AMFI)

Madam/ Sir,

Subject: Ease of doing business – Streamlining of prudential norm for passive schemes regarding exposure to securities of group companies of the sponsor of Mutual Funds

1. A working group was constituted by SEBI to review the present regulatory framework under SEBI (Mutual Fund) Regulations, 1996 (“MF Regulations”) and recommend measures to promote ease of doing business for Mutual Funds.

2. Pursuant to public consultation on the recommendations of the working group and deliberations in the Mutual Funds Advisory Committee (MFAC), it was decided to streamline the extant prudential norm applicable to investments by passively managed Mutual Fund schemes in the group companies of their sponsors. Accordingly, the MF Regulations have been amended vide notification No. SEBI/LAD-NRO/GN/2024/188 dated July 02, 2024.

3. Pursuant to the said amendment, clause 9 of Seventh Schedule of the MF Regulations, inter alia mandates that no Mutual Fund scheme shall make any investment in the listed securities of group companies of the sponsor which is in excess of 25 per cent of the net assets of the scheme, except for investments by equity oriented exchange traded funds (ETFs) and Index Funds and subject to such conditions as may be specified by SEBI. Accordingly, it has been decided as under:

3.1. Equity oriented ETFs and Index Funds, based on widely tracked and non-bespoke indices, can make investments in accordance with the weightage of the constituents of the underlying index. However, such investments shall be subject to an overall cap of 35% of net asset value of the scheme, in the group companies of the sponsor.

3.2. Widely tracked and non-bespoke indices shall be indices that are tracked by passive funds or act as primary benchmark for actively managed funds with collective Assets under Management (AUM) of INR 20,000 Cr. and above.

3.3. The list of indices based on the criteria specified at paragraph 3.2 above, shall be determined on half yearly basis as per the above specified AUM threshold as on March 31^st and September 30^th respectively. The list of such indices shall be updated by AMFI and published on its website by April 15^th and October 15^th respectively every year, after seeking SEBI’s approval.

3.4. Based on the criteria specified at paragraph 3.2 above, the list of indices as on June 30, 2024 is provided at Annexure A.

3.5. Passive schemes based on underlying indices, other than those indices mentioned at Annexure A of this circular, shall be rebalanced within 30 business days from the date of issuance of this circular.

3.6. In case the portfolios of such schemes are not rebalanced within the period of 30 business days, justification in writing, including details of efforts taken to rebalance the portfolio shall be placed before the Investment Committee of the AMC. The Investment Committee, if so desires, can extend the timeline for rebalancing up to 60 business days from the date of completion of mandated rebalancing period.

3.7. In case the portfolios of schemes are not rebalanced within the aforementioned mandated plus extended timelines, AMCs shall not be permitted to launch any new scheme till the time the portfolio is rebalanced and not levy exit load, if any, on the exiting investors of such scheme(s).

4. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 44 (1), clause 9(c) of Seventh Schedule and Regulation 77 of the MF Regulations to protect the interest of investors in securities and to promote the development of, and to regulate the securities market.

5. This circular is available at sebi.gov.in under the link “Legal ->Circulars”.

Yours faithfully,

Lakshaya Chawla
Deputy General Manager
+91-22-26449369
lakshayac@sebi.gov.in

Annexure A

List of widely tracked and non-bespoke indices

(based on AUM as on June 30, 2024)