The Securities and Exchange Board of India (Sebi) has decided to implement timelines for the utilization of funds raised through New Fund Offers (NFOs) by asset management companies (AMCs) and has relaxed regulations regarding the alignment of interests between AMC employees and unitholders. Additionally, Sebi has mandated the disclosure of stress testing for all mutual fund schemes to provide increased transparency for investors.

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These measures, which were approved by Sebi’s board on Wednesday, are aimed at improving operational flexibility for mutual funds while also enhancing accountability and trust among investors.

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In terms of deployment timelines, Sebi has specified that fund managers must invest funds collected during an NFO according to the predetermined asset allocation of the scheme, typically within a 30-day timeframe

SEBI stated after the board meeting on Wednesday that the purpose of the new rule is to establish a timeframe for fund managers to utilise the funds raised in an NFO according to the specified asset allocation of the scheme.

The updated guidelines are designed to incentivize asset management companies to raise only as much capital in NFOs as they can feasibly deploy within a reasonable timeframe, typically within 30 days. This is because investors in open-ended funds always have the flexibility to invest in the scheme at a later date based on the current NAV. 

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The new rules now allow investors to exit a scheme without any exit load if the fund manager is unable to deploy the fund within the specified timeline.

Furthermore, to prevent mis-selling in NFOs, distributors will receive the lower of the two commissions offered under the two schemes involved in a switch transaction.

SEBI has eased the regulatory framework concerning the alignment of interest between designated employees of the AMCs and unitholders to simplify operations for Mutual Funds, while also requiring disclosure of stress testing results for all mutual fund schemes.

The relaxation measures encompass reduced minimum investment requirements, less frequent disclosure obligations, shorter lock-in periods for resigned employees, increased authority for the Nomination and Remuneration Committee to ensure compliance by designated employees, eased criteria for employees overseeing liquid funds, and more lenient redemption policies.