The Securities and Exchange Board of India (Sebi) on Thursday directed mutual fund houses to deploy funds collected in a new fund offer (NFO) within 30 business days from the date of allotment of units amid concerns over mis-selling by asset management companies (AMCs).
The move is aimed at encouraging AMCs to collect only as much funds in NFOs as can be deployed in a reasonable period of time and to discourage any mis-selling of NFOs.
The regulator has asked AMCs to specify achievable timelines in the Scheme Information Document (SID) of a new offering regarding the deployment of the funds as per the specified asset allocation of the scheme and garner funds during the NFO accordingly.
“The AMC shall deploy the funds garnered in an NFO within 30 business days from the date of allotment of units,” Sebi said in a circular. The new rule will come into effect from April 1, 2025.
Currently, there is no timeline for the deployment of funds collected in any NFO.
There have been instances where fund houses sold high-risk mutual funds schemes to investors with low risk appetite. Even the fund houses have taken more than a month to deploy funds collected in these NFOs, particularly in thematic funds, hurting the interest of investors. Sebi has been concerned about this practice for a long time and has now announced a strict timeline for fund deployment, said an industry expert.
If the AMC is not able to deploy the funds in 30 business days, reasons in writing, including details of efforts taken to deploy the funds, should be placed before the Investment Committee of the AMC, the regulator said.
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“The Investment Committee may extend the timeline by 30 business days, while also making recommendations on how to ensure deployment within 30 business days going forward and monitoring the same,” the circular said.
The committee should examine the root cause for delay in deployment before granting approval for part or full extension, the Sebi said. It should not ordinarily give part or full extension where the assets for any scheme are liquid and readily available.
The markets regulator further said that in case the funds are not deployed as per the asset allocation mentioned in the SID, the AMC will not be permitted to receive fresh flows in the same scheme till the time the funds are deployed.
Also, the AMC will “not be permitted to levy exit load, if any, on the investors exiting such scheme after 60 business days of not complying with the asset allocation of the scheme”.
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Sebi said that to effectively manage the fund flows in the NFO, the fund manager can extend or shorten the NFO period (except for Equity Linked Savings Schemes or ELSS), based on their view of the market dynamics, availability of assets and their ability to deploy funds collected in the NFO.
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