Sebi directs mutual funds to invest more in own schemes

Under the new guidelines, the top 10 active equity schemes in terms of assets would collectively require investments of around Rs 365 crore -- up from mandated Rs 50 lakh at present -- in their own schemes.

Domestic asset management companies will soon have to invest a significantly higher sum in their own schemes.

The Securities and Exchange Board of India has issued the framework aimed at to aligning the interest of the AMC and the unit holders. Under this, AMCs will now have to invest between 0.03 per cent and 0.13 per cent of the scheme corpus based on the risk levels of the individual schemes.

According to a calculation by Business Standard, the top 10 active equity schemes in terms of assets would collectively require investments of around Rs 365 crore -- up from mandated Rs 50 lakh at present -- in their own scheme under the new guidelines.

Sebi has given fund houses time till May 2022 to meet this requirement.

Currently, fund houses are required to invest a maximum of Rs 50 lakh per scheme. In August, Sebi’s board removed the upper ceiling and instead linked the investment to the fund size and risk in a bid to ensure more skin in the game.

The risk profile will be as per the existing labels under the risk-o-meter framework.

If the risk value is less than or equal to one, MFs need to invest 0.03 per cent in the scheme, while if the risk value is more than five, 0.13 per cent of the assets under management of the scheme will be invested in the scheme.

AMCs that operate the country’s largest actively-managed equity schemes, may have to increase their investments as much as 10 times.

G Pradeepkumar, CEO, Union AMC said, "This will ensure that investment by fund houses in the schemes will be in line with the riskiness of the scheme and the AUM. As the scheme size grows, AMCs have to invest more money. This is a welcome step and will help to align the interests of AMCs with that of unitholders more closely."

The regulator, in its circular, stated that the risk value of the scheme as per the risk-o-meter of the immediate preceding month shall be considered and the investment shall be maintained at all points of time till the completion of tenure of the scheme or till the scheme is wound up.

"AMCs may invest from their net worth or the sponsor may fund the AMC to fulfill the aforesaid obligations, if required. However, the AMCs shall be required to make good the shortfall in the minimum net worth to comply with the requirement of the MF Regulations in case of sustenance of temporary mark to market loss for two consecutive quarters," said the Sebi circular. 

AMCs shall ensure that such temporariness of the mark to market loss is certified by the statutory auditor. Market participants say that this move will significantly increase the cost and will benefit players who have higher net worth.

Currently, an AMC has to maintain a net worth of Rs 50 crore. Earlier, Sebi’s expert group had proposed investment between 0.03 per cent and 0.25 per cent. However, this would have entailed investment of around Rs 3,953 crore –five times of the total existing investment, as per Sebi.

AMCs shall not be required to invest in exchange traded funds, index funds, overnight funds, funds of funds schemes and in case of close ended funds wherein the subscription period has closed as on date of coming into force of MF Amendment Regulations.