India’s market regulator, the Securities and Exchange Board of India, has opened the door to significant changes in how mutual fund companies can conduct their business. In a new proposal released on Monday, SEBI suggested easing the broad-basing requirements that currently restrict Asset Management Companies from offering certain fund management services. This could mark a major shift in how AMCs operate in the Indian financial ecosystem.
Under existing rules, asset management companies are only allowed to manage pooled funds that are considered broad-based. If they want to handle non-broad-based funds, they need to obtain a separate Portfolio Management Services license. This regulatory barrier has long been a point of contention for mutual fund houses who believe it prevents them from competing on equal footing with other financial service providers.
SEBI’s latest circular acknowledges this concern. It states that many AMCs have the necessary domain expertise to manage a wider variety of pooled assets, including those that fall outside the current definition of broad-based funds. However, because of the rigid regulatory requirement, these companies are unable to take up such mandates, thereby losing out on business opportunities while also limiting investor access to professional fund management.
The regulator is now seeking public feedback on the proposal and has set a deadline of July 28 for stakeholders to submit their comments. If these reforms go through, AMCs may soon be allowed to manage non-broad-based funds without the need for a separate license, provided they adhere to strict governance standards.
The circular also proposes expanding the permissible activities of AMCs and their subsidiaries. These companies could be allowed to engage in ancillary operations like distribution and marketing services, provided they are overseen by domestic or foreign regulators. The goal is to ensure that these new business lines remain within the framework of established regulatory jurisdictions, preserving transparency and investor protection.
While the move promises to unlock new avenues for mutual fund companies, SEBI has also identified key risks that must be managed. These include concerns around resource allocation, potential conflicts of interest, insider trading, and the possibility of transferring assets between businesses in a way that could disadvantage mutual fund investors.
To mitigate these risks, SEBI is likely to introduce detailed compliance guidelines. For instance, AMCs may need to allocate resources to non-broad-based fund activities in proportion to the fees earned from those funds. This will help ensure that mutual fund investors are not indirectly footing the bill for services they do not benefit from. Additionally, the personnel responsible for managing different types of funds may need to be clearly separated unless the investment objectives and asset allocations of the funds are exactly the same.
This move by SEBI indicates a more flexible and modern approach to financial regulation, reflecting the evolving nature of the asset management industry. As AMCs look for ways to stay competitive and deliver value, these reforms, if finalized, could help create a more dynamic and inclusive financial landscape in India.
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