Informist, Monday, Jul. 7, 2025

--SEBI releases consultation paper on reviewing business activities of AMCs

--SEBI proposes allowing AMCs to manage pooled non-broad based funds
--SEBI seeks comments on AMC business activity consultation paper by Jul 28

NEW DELHI – The Securities and Exchange Board of India Monday proposed allowing mutual fund asset management companies to manage pooled non-broad-based funds in a consultation paper on the regulatory framework on permissible business activities by their asset management companies. The regulator has sought comments from stakeholders on the consultation paper by Jul. 28.

Currently, regulations allow a mutual fund asset management company to provide management and advisory services to pooled assets that are broad-based. To provide the same services for non-broad-based funds, asset management companies need to obtain a portfolio management service licence. The proposal raises several conflicts, for which SEBI has proposed guardrails.

A broad-based pooled asset is one with at least 20 investors and no single investor accounts for more than 25% of the corpus. SEBI said asset management companies had flagged the issue of missing out on opportunities to manage pooled assets due to regulatory restrictions on the "broad-based" nature, despite having expertise. Industry body, the Association of Mutual Funds in India, had also made a representation to the regulator to relax the norms, the paper said.

"In view of the same, it was decided to review and consider relaxing the broad-basing requirement and permitting AMCs to serve pooled non-broad-based funds as well, subject to strong governance and regulatory controls that would address any concerns related to conflicts of interest situations," the consultation paper said.

To address the concerns of mutual fund investors paying higher fees and diversion of resources towards these non-broad-based assets, SEBI proposed that asset managers would ensure the resources dedicated to those funds are proportionate to the fees gained, and mutual fund investors are not made to bear the cost to service pooled non-broad-based funds. Since this may incentivise devoting resources to non-broad-based funds, SEBI proposed a cap on the fee differential or the ability to set floor and ceiling fees to manage non-broad-based funds.

"Further, to avoid any preferential treatment to pooled non-broad-based funds, charging of any performance-related fees by AMCs may be restricted," SEBI said. The chief compliance officer may remain the same across both sets of products as the person in the position doesn't take any investment or client-facing decisions – the top management including the chief executive and finance officers will remain the same.

It also mooted disclosing the performance of non-broad-based funds half-yearly against similar mutual fund schemes. Unit holder protection committees can periodically review the fee differentials between the two types of offerings and monitor the resource allocation, according to the consultation paper.

To combat the risk of contrary trade positions and front-running, SEBI proposed a written policy with defined roles for team members and an automated order management system, bringing the broad-based and non-broad-based portfolios at par. Restrictions on contrary trade and investment in thematic funds may be extended to asset managers, similar to those for companies advising and managing foreign portfolio investor funds out of the International Financial Services Centre, would be applied to asset management companies dealing in pooled non-broad-based funds.

Asset managers are already covered under Prohibition of Insider Trading norms, which may prevent issues arising on that head, SEBI said. The regulator proposed two additional measures: activities for pooled non-broad-based funds may not be done on the basis of information gained from mutual fund activities, and the information used for the proposed funds would not put mutual fund investors at any disadvantage.

"To protect the interest of the mutual funds' investors and to avoid any transfer of securities to or from mutual fund schemes on unfavourable terms, at this stage, it is proposed that the transfer of securities between pooled non-broad-based funds and mutual fund schemes may not be allowed," the consultation paper said.

Pooled non-broad-based funds managed and advised by asset management companies shall be appropriately regulated either domestically or abroad. Other provisions of the SEBI norms on mutual fund regulations would apply to the new vertical, the regulator said.

The consultation paper also proposed to segregate information sharing between an asset management company in its role as a mutual fund manager and as a portfolio management service. The regulator laid out two options, the first being that the portfolio management services be provided through a subsidiary of the asset manager with distinct key personnel. The other option is that the portfolio management service runs as a distinct business unit with a Chinese wall from the mutual fund business, and its principal officer reports directly to the board, without the involvement of the asset management company's executives. In both modes, SEBI proposed that research personnel and subscriptions be common for the entity.

SEBI also proposed ring-fencing an asset management company's activities in the pension fund and fund distribution space, by allowing these these activities only through a subsidiary of the asset manager. AMFI had proposed expanding the scope of these services. The consultation paper mooted allowing those subsidiaries, which are registered as pension funds, to act as a point of presence for pension funds and receive compensation for these services. Currently, these points of presence set up by asset management companies cannot receive any fees or commissions from the activity.

As for distribution, asset managers can sell direct plans of the mutual fund schemes they manage. Their subsidiaries overseas may be allowed to register as a distributor for global distribution for market and selling direct plans, the consultation paper said. No commission or fees may be received on this account, SEBI proposed.

"With respect to the funds managed and advised by AMC other than mutual funds schemes and outside India, it is proposed that AMCs may be allowed to distribute funds managed and advised by the AMCs other than mutual fund schemes through its subsidiary, provided such distribution activities and fund management activities are regulated by a foreign regulator/jurisdiction and is in compliance with the regulatory framework specified by such foreign regulator/jurisdiction," the regulator said.

The regulator also proposed all relevant conditions applicable to broad-based funds and as proposed for pooled non-broad-based funds, apply to entities investing in India other than the foreign portfolio investor route from IFSC. The current framework aligning IFSC activity by a subsidiary of an asset manager should now be aligned with the framework proposed for managing and advising broad-based and pooled non-broad-based funds, the consultation paper said. End

Reported by Aaryan Khanna

Edited by Saji George Titus

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.