The New Asset Class Proposal of SEBI: An Interpretive Study of Market Conventions and Regulatory Framework
On July 16, 2024, the Securities and Exchange Board of India (SEBI) published a consultation document outlining a new asset class meant to close the gap between mutual funds and Portfolio Management Services (PMS). The legal structure, regulatory consequences, and possible influence on the market of this creative financial product is investigated in this thorough investigation.
Legislative Structure and Regulatory Setting
Under Section 11 of the Securities and Exchange Board of India Act, 1992, which gives the regulator authority to defend investor interests and advance market growth, SEBI’s statutory authorities point to a new asset class. Reiterated by the Supreme Court in Sahara India Real Estate Corporation Ltd. v. SEBI (2012), this approach conforms with Section 11(2)(b) duty of SEBI to register and control the running of collective investment schemes.
Building on current systems set under the SEBI (Mutual Funds) Regulations, 1996, and SEBI (Portfolio Managers) Regulations, 2020, the regulatory framework strikes a moderate ground with a minimum investment level of INR 10,00,000. This positioning captures SEBI’s sophisticated approach to market segmentation, as previously approved by the Supreme Court in SEBI v. Rakesh Agrawal (2004), where the Court stressed the regulator’s power to establish unique market categories.
Operational requirements and eligibility criteria
The eligibility of asset management companies
- The consultation document sets Asset Management Companies’ (AMCs’) dual-track eligibility system:
Track Record Standards:
- Three years minimum of operating experience
- Minimum INR 10,000 crores’ Assets Under Management (AUM)
- Clean regulatory records under certain SEBI Act, 1992 sections.
Control Criteria:
- Chief Investment Officer’s (CIO) appointment
- Additional fund manager with significant AUM handling background
- This structure makes connections with the eligibility criteria set in SEBI v. Kishor R. Ajmera (2016), where the Supreme Court maintained SEBI’s ability to enforce strict qualifying conditions for market intermediaries.
Structural Framework and Investment Guidelines
Liquidity Management and Investment Strategy
The suggested architecture uses adjustable redemption frequencies in line with SEBI (Listing Obligations and Disclosure Requirements) Guidelines, 2015. Emphasising the mix between market efficiency and investor protection, this approach represents the regulatory attitude expressed in SEBI v. Pan Asia Advisors Ltd. (2015).
Exchange Listing Policies
Following Exchange Traded Funds’ (ETFs’) precedent set by SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2019/011, the mandatory listing requirement for investment strategy units improves liquidity and market accessibility. This need fits the Supreme Court’s 2012 endorsement of market openness as seen in Sahara India Real Estate Corporation Ltd. v. SEBI.
Legal and Risk Management Framework Derivative Market Exposure
Control Values for Regulation
Different from conventional mutual fund rules, the consultation paper suggests a complex strategy to derivative market exposure. The construction comprises:
Limitations of Exposure:
- Peak gross exposure limited to one hundred percent of net asset value
- Limited single stock derivative exposure to 10% of net assets
- Limit aggregate derivative exposure to half of net assets.
Forbidden Activities:
- specifically forbade using
- Restraints on speculative trading
- These restrictions follow the regulatory ideas developed in SEBI v. Kishore R. Ajmera (2016), where the Court underlined the need of risk control in derivative trading.
Inverse ETF Issues
The research tackles the complexity of inverse ETF investing and notes the compounding effects capable of producing different returns. This study complements global regulatory policies, including the U.S. Securities and Exchange Commission’s advice on leveraged and inverse ETFs ( Release No. 34-89372).
Risk Control and Investor Protection
Framework based on Consent
Like the PMS framework under Regulation 23 of SEBI (Portfolio Managers) Regulations, 2020, the proposal calls for a consent-based approach to derivative investments. The Court underlined in SEBI v. Cabot International Capital Corporation (2015) the need of informed investor consent in sophisticated financial products, therefore validating this approach.
Standard of Minimum Risk Aversion
Minimum risk aversion criteria established by means of investment limits and exposure limits mirror the regulatory ideas expressed in SEBI (Mutual Funds) Regulations, 1996, and later changes. These criteria coincide with the views of the Supreme Court on the need of strong risk management systems in SEBI v. Pan Asia Advisors Ltd. (2015).
Openness and Transparency Guidelines
Marketing and Correspondence
To establish the new asset class apart from conventional mutual funds, the consultation document underlines the need of strong branding. This strategy supports court precedent in SEBI v. Sahara India Real Estate Corporation Ltd. (2012) in line with the disclosure rules set in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Disclosure Requirements for Portfolios
Requirements for monthly portfolio disclosure improve openness and follow global best standards. While appreciating the operational difficulties and expenses related to regular disclosures, these criteria build on current disclosure systems set under SEBI Circular CIR/IMD/DF/21/2012.
Regulatory Authority and Compliance
Approval Prerequisites
Approval of SEBI before implementing new investment plans guarantees regulatory control in line with the values set in SEBI v. Kishore R. Ajmera (2016). As the Supreme Court underlined in several decisions, this strategy strikes a mix between creativity and investor protection.
Requirements Regarding Constitutional Documents
The required public availability of constitutional documents improves openness and conforms with the values of market integrity outlined in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Market Influence and Future Consequences
segmentation of markets
The launch of this new asset class marks a major change in market segmentation and might generate a new category of informed retail investors. This conforms with Section 11(1) of the SEBI Act, 1992, which gives statutory responsibility to SEBI to create and control securities markets.
Innovation and Competency
The twin-track eligibility rules preserve high standards of fund management while promoting market competitiveness. This strategy ensures investor safety and reflects the regulatory attitude expressed in SEBI v. Rakesh Agrawal (2004), therefore encouraging market development.
- Advice on Application
- Development of uniform risk assessment techniques: Framework for Risk
- Following frequent stress testing criteria
- Development of explicit risk communication strategies
Operating Instructions:
- Comprehensive rules for calculations of derivative exposure
- Explicit protocols for investor permission documents
- Particular criteria for risk-disclose statements
Examining and supervising:
- Conventions for regular reporting on derivative exposures
- Regular evaluation of systems of risk management
- Well defined guidelines for regulatory intervention
Finally
The suggested new asset class by SEBI marks a major change in the control of securities market in India. Supported by accepted legal rules and regulatory precedents, the framework shows a deliberate balance between innovation and investor protection. The success of this program will rely on efficient application of the suggested protections and ongoing market observation.
The emphasis of the consultation paper on risk management, openness, and investor protection on line with SEBI’s statutory mandate and international best practices is But the success of these steps will depend on careful review of market comments and possible improvements to the suggested structure.
This new asset class could be very important in satisfying the needs of sophisticated retail investors as the Indian securities market develops, hence preserving market stability and integrity. The success of this program will rely on SEBI’s capacity to keep efficient control while giving enough freedom for market innovation and growth.
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