The market regulator has directed asset management companies to deploy the NFO funds within 30 business days, or face consequences
The Securities and Exchange Board of India (Sebi) has instructed asset management companies (AMCs) to invest the capital raised during the new fund offering (NFO) period within 30 business days from the date of allotment of units. This change will come into effect from April 1, 2025, the market regulator said in a circular issued on Thursday, February 27.
Sebi said that this rule has been introduced to encourage AMCs to raise only as much capital in NFOs as can be deployed within a reasonable timeframe and to prevent the mis-selling of mutual fund schemes during the NFO process.
Accordingly, the market regulator also asked asset management companies (AMCs) to specify achievable timelines for fund deployment in the Scheme Information Document (SID).
The deadline can be extended by another 30 days in "exceptional cases". In such cases, Sebi has mandated AMCs to provide a written explanation, detailing the reasons for the delay and the efforts taken to deploy the funds, to the Investment Committee of the AMC.
"The Investment Committee shall examine the root cause for delay in deployment before granting approval for part or full extension," the regulator added.
If the funds are not deployed according to the asset allocation mentioned in the SID within the mandated and extended timelines, the AMC will face the following consequences:
It will not be allowed to receive fresh inflows into the same scheme until the funds are deployed as per the asset allocation in the SID.
The AMC will not be permitted to charge an exit load, if applicable, on investors exiting the scheme after 60 business days of non-compliance with the asset allocation.
The AMC must inform all investors of the NFO about the option to exit the concerned scheme without an exit load, through email, SMS, or other similar communication methods.
The AMC must report any deviation to the Trustees at each of the above stages.
The circular also highlighted the issue of mis-selling of mutual fund schemes by distributors. Starting from April 1, 2025, distributors will no longer benefit from switching investors' money to an NFO.
"In order to discourage misselling by MF distributors, in case of switch transaction to NFO of a regular plan of MF scheme from an existing scheme managed by the same AMC, the AMC shall ensure the distribution commission paid is lower of the commissions offered under the two schemes of switch transaction," the circular added.