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Published on 10 April 2025

SEBI Consults on Enhancing Ease of Business for Mutual Funds

Introduction

The Securities and Exchange Board of India (SEBI) has issued a consultation paper inviting public feedback on measures to improve the ease of doing business for Mutual Funds (MFs). This initiative aims to simplify compliance, reduce costs, and aligns with the Finance Minister's announcements for the fiscal year 2023-24. SEBI encourages stakeholders, including market participants, to evaluate the proposals and submit their insights by the specified deadline. This cooperative effort is intended to enhance operational efficiency and create a more favorable environment for the mutual fund industry.

Objectives of the Consultation Paper

Purpose

1.1 The consultation paper seeks the public's comments and suggestions on proposed initiatives to improve the ease of doing business for Mutual Funds (MFs).

Background Information

Financial Sector Compliance Simplification

2.1 In the budget announcements for FY 2023-24, the Hon’ble Finance Minister emphasized the need to simplify compliance requirements in the financial sector through inclusive consultation.

Formation of Working Groups

2.2 To align the review process with the budget's objectives, SEBI established several Working Groups to recommend measures for easing compliance under its regulations. A working group specifically focused on Mutual Funds ("WG") was formed to examine the existing framework under the SEBI (Mutual Funds) Regulations, 1996 ("MF Regulations"). It aims to propose improvements that promote ease of doing business for MFs.

Public Commentary and Further Initiatives

2.3 SEBI, via its Press Release dated October 4, 2023, requested public comments on various regulations, including MF Regulations, due by November 6, 2023.

WG Recommendations Overview

2.4 The public comments received have been directed to the WG for consideration in its final recommendations. The WG has conducted a detailed review of applicable processes and guidelines for MFs, providing interim recommendations on:

  • Appointment of a single fund manager for both domestic and overseas/commodity funds.
  • Relaxation of nomination requirements for joint holders.
  • Streamlining prudential norms for passive schemes concerning exposure to a single issuer within the Asset Management Company’s (AMC) group.

This consultation paper unveils the WG’s recommendations and seeks public input on these matters.

Issues for Public Consultation

1. Appointment of a Single Fund Manager

1.1 Current regulations, outlined in Clause 3.3.11 of the Master Circular for Mutual Funds dated May 19, 2023, dictate the necessity of appointing dedicated fund managers for commodity funds. This regulation states:

1.2 Additionally, Clause 12.19 of the Master Circular on “Overseas Investment” mandates AMCs to appoint a dedicated fund manager for overseas investments.

Challenges Identified by the Working Group

1.3 The WG identified several operational challenges related to the existing requirements:

  • The dual appointment of dedicated fund managers incurs additional costs for AMCs.
  • Transactions in overseas securities are limited, making a separate fund manager unnecessary.
  • AMCs already employ research analysts for both domestic and overseas investments, suggesting that easing the current provisions may be feasible.

WG Recommendations

1.4 The WG recommends making the appointment of dedicated fund managers for commodity and overseas investments optional, provided that:

  • AMCs ensure that the appointed fund manager possesses the requisite expertise and experience for such investments. The Board of the AMCs is accountable for compliance and must periodically report to trustees.

Consultation Proposal 1

Please assess the recommendations outlined in paragraphs 1.4 and submit your comments with supporting rationale.

2. Nomination for Mutual Fund Units

2.1 Clause 17.16 of the Master Circular mandates all individual unit holders to provide nomination details by September 30, 2023, or face frozen folios for debits. This deadline has been extended to June 30, 2024, based on representations from market participants.

Issues Raised by the Working Group

2.2 The WG has indicated the following concerns regarding nominations:

  • In jointly held folios, surviving holders take precedence over nominees during unit transmission, minimizing the risk of unclaimed units or fraud.
  • All holders must confirm nominations, which can delay processing if not all are available simultaneously.

WG Recommendations

2.3 The WG suggests making the requirement for nominations optional for jointly held folios.

Consultation Proposal 2

Consider the recommendations in paragraph 2.3 and submit your comments with supporting rationale.

3. Streamlining Prudential Norms for Passive Schemes

3.1 Clause 9 of the Seventh Schedule of the MF Regulations prohibits MFs from investing over 25% of net assets in securities of group companies.

3.2 It further states that no single stock can exceed 35% weight in underlying indices for sectoral/thematic index-based passive funds.

WG Observations

3.3 The WG observed that while MF schemes cannot invest more than 25% of NAV in sponsor group companies, passive schemes can have a higher exposure based on their index.

WG Recommendations

3.4 The WG recommends excluding equity-oriented ETFs and index funds based on widely tracked indices from the 25% limit in sponsor group investments, allowing investments according to index weightage.

Consultation Proposal 3

Please evaluate the proposals outlined in paragraph 3.4 and provide your feedback with supporting rationale.

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