Securities and Exchange Board of India (SEBI) has proposed amendments to the SEBI (Mutual Funds) Regulations, 1996, to introduce specified timelines for deploying funds collected by Asset Management Companies (AMCs) during New Fund Offers (NFOs). Currently, while NFOs are governed by regulations and guidelines such as a maximum subscription period and permitted temporary deployment of funds, there is no defined timeline for fund deployment per the asset allocation stated in the Scheme Information Documents (SIDs). A review of past NFOs indicates that most AMCs achieved the specified asset allocation within 60 days of unit allotment, with only a few exceptions. Delays were attributed to factors like market conditions, geopolitical uncertainties, and valuation challenges. To streamline fund deployment and enhance transparency, SEBI’s Mutual Funds Advisory Committee has recommended a timeline of 60 business days, extendable by 30 business days upon approval by the Investment Committee. The proposed amendments are intended to standardize operations across AMCs, reduce delays, and align with investor expectations. Public comments on these changes can be submitted through SEBI’s website.
Securities and Exchange Board of India
Sub: Amendments to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 for specifying timelines for deployment of funds collected by Asset Management Companies (AMC’s) in New Fund Offer (NFO) as per asset allocation of the scheme
1. Objective
This memorandum seeks approval of the Board for amendments to the SEBI (Mutual Funds) Regulations, 1996 (hereinafter referred to as ‘MF Regulations’) to specify timelines for deployment of funds collected by Mutual Funds in New Fund Offers (NFO), as per the specified asset allocation of a scheme.
2. Background
2.1. Under the present MF Regulations, Regulation 34 requires that no scheme of a mutual fund, other than the initial offering period of any equity linked savings schemes shall be open for subscription for more than 15 days.
2.2. In addition, the provisions applicable for NFOs are prescribed under Clause 1.10 of the Master Circular dated June 27, 2024 (“Master Circular”) wherein it is inter alia specified that the all NFOs shall remain open for subscription for a minimum period of 3 working days. Further, Clause 1.10 of the Master Circular also prescribes the parameters for deployment of funds received in NFO such as temporary deployment in triparty repo on Government securities or treasury bills etc. However, there is no regulatory provision specifying the timeline for deployment of funds after the closure of NFO. As a result, most of the AMCs do not specify any timeline in Scheme Information Documents (SIDs) for deployment of funds received in NFO.
2.3. Considering that the size of the corpus required to be deployed after NFO could be significantly large, suitable flexibility is required to be provided to the fund managers to deploy the funds according to their views on the market. However, it is not desirable for an AMC to retain the proceeds received through NFO, for an indefinite period without deployment in the stated assets. Therefore, it would be prudent to have a timeline within which deployment of funds may be required to be made as per the prescribed asset allocation of a scheme.
2.4. The data for the last three financial years (FY 2022, FY 2023 and FY 2024) regarding the number of days taken by the AMCs to deploy the funds as per the asset allocation was analysed. The summary of the observations is as under:
| No. of days taken by AMC to deploy the funds as per asset allocation of the scheme from the date of | No. of Schemes |
| Above 90 days | 5 |
| Above 60 days but below or equal to 90 days | 9 |
| Above 30 days but below or equal to 60 days | 30 |
| Below or equal to 30 days | 603 |
| 647 |
2.5. As observed from the above data, in 603 out of the 647 new fund offers of the schemes, AMCs took less than 30 days from the date of allotment of units to achieve the asset allocation as specified in the SID of the scheme. Further, cumulatively for 633 new fund offers of the schemes, the AMCs took less than 60 days from the date of allotment of units to achieve the asset allocation as specified in the SID of the scheme. Therefore, 98 percent of the new fund offers of the schemes launched in the last financial year were able to achieve the asset allocation as specified in the SID in 60 days or less.
2.6. Further, a root cause analysis was carried out to understand the reasons for delay in deployment of funds garnered in NFO, which mainly included expensive valuation in certain sectors or market capitalizations, market dynamics, uncertainty following geo political developments, unavailability of security with specific maturity etc.,
2.7. The proposal of specifying timelines for deployment of funds received through NFO was deliberated by the Mutual Funds Advisory Committee (MFAC) in its meeting held on March 28, 2024. MFAC agreed with the proposal of specifying a timeline for deployment of funds received in NFO and suggested a timeline of 60 business days, which may be further extended by 30 business days by Investment Committee.
2.8. The above matter of timely deployment of funds received in NFO was also discussed with Association of Mutual Funds in India (AMFI) wherein it was suggested that the timeline for deployment of funds should be within 90 days.
2.9. Based on the feedback received from the industry and internal discussions, consultation paper dated October 30, 2024 (copy of the consultation paper is placed as Annexure-A) was issued seeking comments from the public.
2.10. The consultation paper received responses from 15 entities including AMCs, Department of Economic Affairs (DEA) and other stakeholders during the consultation period. The comments received regarding the proposals of the consultation paper are placed as Annexure B.
2.11. The proposals in the consultation paper and the public comments received are discussed in the subsequent paras.
3. Regulatory changes pursuant to the consultation paper
3.1. Proposals in the consultation paper
3.1.1. The AMC should specify achievable timelines in the SID regarding the deployment of the funds as per the specified asset allocation of the scheme and should garner funds during the NFO accordingly.
3.1.2. AMCs may be mandated to deploy the funds garnered in NFO within 30 business days from the date of allotment of units. In exceptional case, if the AMC is not able to deploy the funds in 30 business days, reasons in writing including details of efforts taken to deploy the funds, should be placed before respective Investment Committee.
3.1.3. The Investment Committee may extend the timeline by 30 business days, while also making recommendations on how to ensure deployment within 30 business days going forward and monitoring the same. Investment Committee should also examine the root cause before approving part or full extension and should not ordinarily give part or full extension where the assets for such schemes are liquid and readily available.
3.1.4. In case the funds are not deployed as per the asset allocation mentioned in the SID in aforesaid mandated plus extended timelines, AMC may:
i. not be permitted to launch any new scheme till the time the funds are deployed as per the asset allocation mentioned in the SID.
ii. not be permitted to levy exit load, if any, on the investors exiting such scheme(s) after 60 business days of not complying with the asset allocation of the scheme.
iii. report the deviation to Trustees at each of the above stages.
3.1.5. The above provisions may be made applicable to all NFOs other than for Index Fund and Exchange Traded Funds.
3.1.6. In addition to the above, feedback was also sought on whether the AMCs should be required to slow down collection of funds in the first place instead of delaying the deployment of funds after NFO, if markets become overvalued or there is inadequate availability of desired assets.
3.2. Public Comments
3.2.1. Majority of the comments were in favour of the proposal of specifying timelines for deployment of funds received in NFO and suggested certain modifications to the proposals. However, few entities were not in favour of some of the proposals. The summary of the comments is as under:
i. A tiered approach for specifying timelines based on fund size and type of scheme may be considered. It has been further suggested that a timeline of 60 plus 30 business days may be considered, with 50% of the funds to be deployed within the first 30 business days and the remaining funds over the subsequent 30 business days.
ii. Some entities have suggested that instead of imposing a restriction on launching new scheme, restriction on fresh flows in the same scheme and restriction on charging Total Expense Ratio (TER) for that period may be considered.
iii. Another comment is that the delay in deployment is not a systemic problem and new regulation could create compliance obligations for all schemes. AMCs operate in a competitive environment and are inclined to deploy funds within a reasonable time. The proposed sanctions on launching new schemes, could be excessively punitive. The fund managers and the investment committee should have the discretion in making investment decisions.
iv. It is also suggested that the timeline for deployment of funds for NFOs of Index Funds and Exchange Traded Funds may also be specified.
3.2.2. With respect to the proposal of slowing down of collection of funds, the response received is mixed in nature wherein some have cited difficulties including significant flows received on the last day of NFO, geopolitical uncertainties, market volatility, etc. and have stated that in any case, the NFO cannot be extended beyond 15 days as per regulations.
3.3. Consideration of issues
3.3.1. As per the present regulatory framework, AMCs have a time period of 6 months from the date of issuance of final observations by SEBI (with respect to a particular scheme) to launch the scheme. Considering that the size of the corpus required to be deployed after NFO could be significantly large, suitable flexibility should be provided to the fund managers. However, the AMC should not be allowed to retain the proceeds received through NFO, for an indefinite period without deployment in the stated assets. Therefore, it would be prudent to have a timeline within which deployment of funds may be required to be made as per the specified asset allocation of the scheme.
3.3.2. Further, while making an investment decision, an investor allocates funds in NFO of the scheme based on the proposed asset allocation of the scheme mentioned in the Scheme Information Document. If the fund manager does not invest the funds as per the specified asset allocation for more than 60 business days (approximately 84 calendar days, assuming there is no public holiday in that period), then it may affect the asset allocation of the investor. Additionally, even though the funds are not being deployed as per the specified asset allocation, the full TER is charged to the scheme. Therefore, allowing 90 business days (approximately 126 calendar days or 4 months) for deployment of funds received in NFO, may not be in the interest of the investors.
3.3.3. With respect to the issue of additional compliance requirements, it is stated that the proposal is to have an outer limit to deploy the funds garnered in NFO. The schemes which already deployed the funds within 30 days would not be affected by the proposed timelines. The objective of having a timeline for deployment of funds is that if the markets are volatile and fund manager is not confident of deploying funds in even 84 calendar days, the NFO should be effectively managed through the closing date, maximum collection amount etc. instead of delay in the deployment of funds for a longer period. Collecting funds from the investors with a promise of a certain allocation and not deploying is not in the interest of the investors. In the absence of specific regulations, an outlier fund can create issues for investors and the market stability, as has happened in the past for debt schemes of one of the AMCs i.e., Franklin Templeton Mutual Fund.
3.3.4. If an investor does not get the desired asset allocation even after the lapse of 60 business days, he should have the option to exit without an exit load. Further, explicit communication of this option in simple language should also be made by AMCs to each investor in the NFO via email, SMS or any other similar mode of communication.
3.3.5. Further, in view of the public comments regarding restriction on launching of new schemes being onerous, it is proposed that instead of imposing restriction on launching of new schemes, fresh flows in that specific scheme may be restricted when AMC is not able to deploy the funds within the proposed timelines. A restriction on fresh flow of funds in the scheme would ensure that the fund manager is not burdened with additional funds while the existing funds are being deployed by the fund manager as per the required asset allocation of the scheme.
3.3.6. Thus, after the proposed changes to the regulatory requirements, if the fund manager is not able to achieve the required asset allocation of the scheme within 60 business days due to market dynamics or any other issues, such scheme would be restricted to receive any further flow of funds and investors would be provided an option of exit, without exit load. These requirements would ensure that the interest of the investor is protected and the investor is not penalised by an exit load, if the fund manager is unable to deploy funds as per the specified asset allocation of the scheme.
3.3.7. In addition to the above, in order to ensure effective management of flows during NFO by a fund manager, fund manager should have adequate flexibility of extending or opting for early closure of the NFO period, based on his view of the market dynamics, availability of assets and ability to deploy funds collected in the NFO. Also, if any scheme which collects excess funds during NFO and invests in the assets which are limited or have lower liquidity, there may be a scenario where due to lower liquidity, exit from such investment may become difficult. This can lead to liquidity risk for the scheme in case of redemption, which is not desirable.
3.3.8. With respect to the suggestion of having a tiered approach based on fund size and type of scheme, it is stated that the proposal is to specify maximum time within which the investment would be required to be made by the fund manager for all schemes. Hence, specifying timelines for each scheme based on fund size and type of scheme may not be desirable.
3.3.9. As regards Index Funds and Exchange Traded Funds, based on feedback received and further internal deliberations, as only an outer timeline for deployment is proposed to be made applicable, it may be prudent to make the same applicable to Index Funds and Exchange Traded Funds as well, subject to compliance with all the applicable requirements related to passive schemes viz, replication, targeting and disclosure of scheme’s tracking error and tracking difference etc.
3.3.10. As the trustees of the Mutual Funds have a fiduciary duty to ensure that the interest of the investors is protected, they should be required to monitor the deployment of funds collected in NFO and ensure that the funds are deployed within a reasonable timeframe.
3.3.11. In the consultation paper dated May 18, 2023 issued by SEBI on the review of TER charged by AMCs (Annexure-C), analysis of data for the period from April 01, 2021 to September 30, 2022 regarding amount garnered in NFOs through switch transactions from other schemes, indicated that switch transactions in regular plans amounted to 93% of total switch transactions. Further, 27.12% of the amount garnered in NFOs, was through switch transactions from regular plans of other schemes of the same AMC and in one of the schemes, up to 55% of the funds garnered in NFO was through switch transactions from other schemes of the Mutual Fund.
3.3.12. Thus, having higher distribution commission structures for NFOs as compared to existing schemes can induce some distributors to churn their investors’ portfolios or mis-sell investment products for higher commissions, which is not desirable. Further, it is understood that the trail commissions paid by AMCs is often higher in the first /initial year(s) of inflows/investments and reduces in subsequent years. This practice of paying lower trail commissions after initial years of investments also encourages churning and/or mis-selling of products by distributors after the first year of investments.
3.3.13. To discourage mis-selling by distributors, the consultation paper dated May 18, 2023, inter alia proposed that in the case of a switch transaction, the distributor shall be entitled to lower of the commissions offered under the two schemes of any switch transaction.
3.3.14. In view of the need for addressing the abovementioned practices, it may be prudent to prescribe suitable requirements for payment of commissions in such cases of switch transactions. With respect to the challenges highlighted regarding implementation of the proposal, it is proposed that the detailed framework may be specified, after consultation with AMFI.
3.4. Proposal:
3.4.1. In view of the above, the following is proposed:
3.4.1.1. The AMC should specify achievable timelines in the SID regarding the deployment of the funds as per the specified asset allocation of the scheme and should garner funds during the NFO accordingly.
3.4.1.2. AMCs may be mandated to deploy the funds garnered in NFO within 30 business days from the date of allotment of units. In exceptional case if the AMC is not able to deploy the funds in 30 business days, reasons in writing, including details of efforts taken to deploy the funds, should be placed before the Investment Committee of AMC.
3.4.1.3. Investment Committee may extend the timeline by 30 business days, while also making recommendations on how to ensure deployment within 30 business days going forward and monitoring the same. Investment Committee shall examine the root cause before approving part or full extension. Investment Committee shall not ordinarily give part or full extension where the assets for such schemes are liquid and readily available.
3.4.1.4. Trustees shall monitor the deployment of funds collected in NFO and take steps, as may be required, to ensure that the funds are deployed within a reasonable timeframe.
3.4.1.5. In case the funds are not deployed as per the asset allocation mentioned in the SID as per the aforesaid mandated plus extended timelines, AMC shall:
i. not be permitted to receive fresh flows in the same scheme till the time the funds are deployed as per the asset allocation mentioned in the SID.
ii. not be permitted to levy exit load, if any, on the investors exiting such scheme(s) after 60 business days of not complying with the asset allocation of the scheme.
iii. inform all investors of the NFO, about the option of exit without exit load, via email, SMS or any other similar mode of communication.
iv. report the deviation to Trustees at each of the above stages. 3.4.1.6. The above provisions shall be made applicable to all NFOs.
3.4.1.7. To effectively manage the fund flows in NFO, the fund manager may extend or shorten the NFO period, based on his view of the market dynamics, availability of assets and his ability to deploy funds collected in NFO. However, the NFO shall remain open for subscription for a minimum period of 3 days and for not more than 15 days, as already provided in the existing regulatory framework.
3.4.1.8. In the case of a switch transaction to NFO, the distributor shall be entitled to lower of the commissions offered under the two schemes of switch transaction. The detailed framework in this regard may be specified in consultation with AMFI.
4. Regulatory amendments to the MF Regulations
4.1. To give effect to the proposals mentioned at para 3.4.1 above, it is proposed to incorporate the following enabling provisions into the MF Regulations:
Excised. Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
5. Proposal for consideration and approval of the Board
5.1. The Board may consider and approve the proposals outlined in paragraphs 3.4 and 4 above. Draft amendments to the SEBI (Mutual Funds) Regulations, 1996, and the draft notification for the proposed amendment are placed at Annexure D1 and Annexure D2 respectively.
5.2. The proposals at para 4 above may be incorporated in the SEBI (Mutual Funds) Regulations, 1996 and at para 3.4 above may be specified by way of the circular.
5.3. A reasonable time, in consultation with AMFI, may be provided for implementation of the proposals.
5.4. The Board may authorize the Chairperson to carry out suitable amendments to the regulations and to take any other consequential or incidental steps for implementation of the decisions of the Board.
Annexure A
Consultation paper is available on SEBI website www.sebi.gov.in at Reports & Statistics» Reports» Reports for Public Comments
Annexure B
This has been excised for reasons of confidentiality.
Annexure C
Consultation paper is available on SEBI website www.sebi.gov.in at Reports & Statistics» Reports» Reports for Public Comments
Annexure D1
Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
Annexure D2
Amendment to SEBI (Mutual Funds) Regulations, 1996, shall be notified after following the due process.
Source: SEBI Board Meeting Dated: Wednesday 18th December 2024
