Sebi Proposes 3 Ease Of Business Rules For MFs, Relaxes Investment Mandates For Passive Funds

Sebi proposes relaxation of investment mandates on passive funds and also makes nomination optional for jointly held folios.
Sebi Proposes 3 Ease Of Business Rules For MFs
Sebi Proposes 3 Ease Of Business Rules For MFs

Sebi on February 23, 2024, proposed to exclude investments made through ETFs and index funds from the regulations on exposure to a single stock of own group companies The proposal was made in a consultation paper released yesterday among three significant proposals to promote ease of doing business and reduce the compliance burden among MFs. Investors and market participants can submit their feedback on this proposal by March 15, 2024.

The first proposal focuses on passive funds, such as exchange-traded funds (ETFs) and index funds, where currently they are restricted in their investments in sponsor group companies, with a cap of 25 per cent of net assets. Additionally, a single stock cannot have over 35 per cent weight in the underlying index for a sectoral or thematic index-based passive fund.

Recognising that in certain sectoral indices, the exposure to a single issuer may be more than 25 per cent and as passive funds are required to replicate a respective underlying index, Sebi suggests relaxing the 25 per cent limit for investments in sponsor group companies, so that investments may be made by the weightage of the constituents of the underlying index avoiding any unintended tracking error.

Other Proposals

Dedicated fund manager Norm Relaxation: SEBI has also proposed to relax the requirement of having a separate and dedicated fund manager in a scheme to oversee gold, silver (and other commodities) and foreign investments.

Currently, mutual funds have to appoint a dedicated fund manager for commodity and overseas investments. Appointment of dedicated fund managers leads to additional costs for the AMCs in terms of employing two fund managers, Sebi noted.

Transactions done by fund managers in overseas securities are comparatively less and therefore, a separate fund manager may not be required solely for overseas investment, Sebi said. Further, fund houses might already have dedicated research analysts in their teams who would be tracking such asset classes. The relaxation was allowed on the condition that AMCs shall ensure the competency of the fund manager, Sebi s

Nomination In Joint Folios: Sebi also proposed that the requirement of nomination may be made optional in the case of jointly held folios.

Sebi recently extended the deadline for mandatory nominations for mutual fund schemes to June 2024, and the folio will be frozen for debit if nominations are not received by the deadline. But in the case of jointly held folios, the surviving holder in a jointly held folio takes precedence over the nominee during the transmission of units. Further, the process of nomination is put on hold if all the unit holders are not available at the time of nomination and this has caused considerable delay in the process. Considering these constraints, Sebi has made nomination optional for jointly held folios.

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