Sebi Proposes Relaxing Mutual Fund Regulations For Asset Management Companies

Sebi AMC Regulations: The capital market regulator released a consultation paper on July 7. The market regulator has released several proposals aimed at modifying the regulatory framework that governs the business activities that an Asset Management Company(AMC) can undertake. Notably, the proposal seeks to review Regulation 24 of the Sebi’s Mutual Fund Regulations, 1996. Regulation 24 has two parts ‘24 a’ and ‘24 b’, which govern the business activities that an Asset Management Company (AMC) can undertake.

What Do Regulations 24a and 24b Restrict

Regulation 24(a) prevents AMCs from acting as trustees of any Mutual Fund, on the other hand, Regulation 24(b) stops AMCs from conducting any business activity other than management and providing advisory services to pooled assets like offshore funds, pension funds, provident funds, insurance funds, etc.

Thus, AMCs were allowed to offer such services only to ‘broad-based’ entities with a minimum of 20 investors, and with no single investor making up over 25 per cent of the total corpus of the fund. However, the market regulator mentioned in the working paper that it has received frequent requests from Mutual Fund industry stakeholders to review Regulation 24(b).

Sebi’s Proposals For Mutual Fund Industry

The market regulator has made several proposals regarding enhancing the ease of doing business for AMCs. The market regulator mentioned that these proposals have been made on the basis of inputs received from the Association of Mutual Funds In India (Amfi).

The market regulator said that several AMCs have claimed that the Regulation 24(b) often becomes a ‘barrier to entry’ and stops companies from gaining a level playing field compared to other entities which provide management and advisory services to non-broad based funds. The AMCs also informed Sebi that while they often have the required domain knowledge and expertise for the management and advisory of pooled assets, restrictions based on the broad basing criteria often prevent them from taking up such opportunities.

The market regulator has proposed to relax the broad-basing requirement, which is a part of Regulation 24 (b), and permit AMCs to serve pooled non-broad-based funds as well. The market regulator added that the relaxation will be given hand in hand with strong governance and regulatory control to address any potential concerns related to instances of conflict of interest (CoI).

How Can The Proposed Relaxation Affect Retail Investors

The market regulator also mentioned some potential conflicts which may affect mutual fund investors if the broad-based norms are relaxed. Some of the potential concerns include diversion of resources, risks related to contra-trading and front running, risks related to the use of insider information for illegal trades and the risk of transfer of assets within the business, which may negatively impact mutual fund investors.

Another key concern highlighted by the Sebi relates to how AMCs will charge performance-linked fees to investors. The market regulator highlighted that AMCs may be tempted to earn ‘super normal profits’ from investors and generate higher returns for pooled non-broad-based funds. This temptation, in turn, may influence the AMC to compromise the interests of investors of broad-based funds. Conversely, another concern related to the charging of performance-linked fees for non-broad-based pooled funds relates to instances in which AMCs may charge a discounted fee from investors of pooled non-broad-based funds by using the resources of broad-based mutual funds. However the market regulator has also proposed to put in place regulatory mechanisms which can combat the conflicts mentioned above.

The market watchdog has proposed that if the broad-basing requirement is relaxed, upper and lower limits on the fee that can be charged for both broad-based and non-broad-based funds will be introduced. Additionally, the regulator has proposed that the charging of performance-linked fees for pooled non-broad-based funds will be restricted.

The AMCs will also be required to periodically disclose the performance of pooled non-broad-based funds in comparison with the performance of comparable mutual fund schemes. Notably, Sebi has proposed that the disclosures be made half-yearly.

To address concerns regarding front-running and potential misuse of insider information, the market watchdog has proposed a separation of fund managers and back-office teams for broad-based and non-broad-based funds. Additionally, a six-month contra trade rule and stringent internal trade allocation policies have also been proposed. The regulator has sought to uphold its insider trading prevention norms to make sure that sensitive data from mutual funds isn’t misused.

Additionally, AMCs that provide services to pooled non-broad-based funds will need to implement a written policy that discloses the reason for any fee differential between the pooled non-broad-based fund and the comparable broad-based fund of the AMC.

The market regulator has sought public comments on the proposals. These comments can be sent online till July 28, 2025.