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The Securities and Exchange Board of India (SEBI) has significantly reshaped the Indian investment landscape with the introduction of two key regulatory amendments: the creation of a new asset class called 'Specialised Investment Fund' (SIF) and the implementation of 'Mutual Funds Lite' regulations. These changes aim to address existing market gaps and promote greater accessibility and innovation within the mutual fund industry. The SIF, approved in September 2023 and officially notified in December, is designed to bridge the gap between the relatively accessible world of mutual funds and the higher-investment threshold of portfolio management services (PMS). This new category offers investors a middle ground, providing access to more sophisticated investment strategies while maintaining a level of regulatory oversight and transparency. The minimum investment limit for SIFs is set at a substantial Rs 10 lakh, immediately establishing it as a product targeting higher-net-worth individuals.
The SIF framework allows for a range of investment strategies, including open-ended, close-ended, and interval funds, with the specific subscription and redemption frequencies clearly outlined in the offer document. A crucial aspect of the SIF regulations concerns diversification and risk management. To prevent over-concentration in any single issuer, the regulations mandate that no more than 20 percent of a SIF's net asset value (NAV) can be invested in debt instruments (money market and non-money market) from a single entity, unless the investment grade rating is below investment grade. This limit can be increased to 25 percent with prior approval from the Board of Trustees and Board of Directors of the asset management company. However, this restriction does not apply to investments in government securities, treasury bills, and triparty repos on government securities or treasury bills. Furthermore, a SIF cannot own more than 15 percent of any company's paid-up capital carrying voting rights, reinforcing the principle of diversified investment and limiting potential market dominance.
In addition to these restrictions on debt investments, the regulations also place a cap on equity investments. No SIF can invest more than 10 percent of its NAV in the equity shares and equity-related instruments of any single company. This dual limitation on both debt and equity exposure is intended to ensure responsible investment practices and mitigate the risks associated with concentrated portfolios. To maintain a clear distinction between SIFs and traditional mutual funds, SEBI mandates that asset management companies (AMCs) must ensure distinct identification for their SIF offerings. This includes adhering to specific branding guidelines, advertising regulations, standard disclaimers, and maintaining a separate website. The intent is to avoid any confusion in the market and ensure transparency for investors. This separation reinforces the understanding that SIFs, despite sharing some characteristics with mutual funds, operate under a different regulatory framework and cater to a distinct investor profile.
Complementing the introduction of SIFs, SEBI has simultaneously introduced 'Mutual Funds Lite' regulations. These regulations focus on reducing compliance requirements for passively managed mutual fund schemes. The goal is multifaceted: to increase penetration of mutual fund investments in the broader population, facilitate greater investment diversification among individuals, and stimulate innovation in the design and structure of mutual fund products. The reduced regulatory burden aims to create a more streamlined and cost-effective environment for launching and managing passively managed funds, potentially leading to lower expense ratios for investors. The specific requirements for an AMC launching a 'Mutual Funds Lite' scheme include a demonstrated track record of fairness and integrity, with the sponsor contributing at least 40 percent to the net worth of the AMC. A minimum net worth of Rs 35 crore is required, reducible to Rs 25 crore if the AMC demonstrates consistent profitability over five consecutive years. These provisions ensure a level of financial stability and operational competence.
In conclusion, SEBI's introduction of the SIF and Mutual Funds Lite regulations represents a significant step towards enhancing the diversity, accessibility, and efficiency of the Indian mutual fund industry. The SIF provides a new avenue for higher-net-worth individuals seeking more sophisticated investment strategies, while the Mutual Funds Lite regulations aim to democratize access to mutual funds for a wider segment of the population. The changes reflect a proactive approach to balancing regulatory oversight with the promotion of innovation and financial inclusion within the Indian investment market. The success of these measures will depend on their effective implementation and the response from both asset management companies and investors. The long-term impact will be closely observed as the market adapts to these significant changes in the regulatory landscape.
Source: Sebi amends mutual fund regulation to introduce new asset class