SEBI makes right moves for ease of mutual fund business

The Securities and Exchange Board of India last week came out with a consulting paper that aimed at ease of doing business for mutual funds. This came after the Finance Minister in the FY24 Budget made an announcement to simplify, ease and reduce cost of compliance for participants in the financial sector through a consultative approach.

One of the key proposals was allowing mutual fund houses to have a single fund manager to oversee commodity and foreign investments. According to SEBI, the appointment of dedicated fund managers leads to additional costs for asset management companies (AMCs) in terms of employing two fund managers. Moreover, AMCs already hire research analysts tracking assets classes at sector level, irrespective of the same being a domestic or overseas investment.

Besides, transactions done by fund managers in the overseas securities are comparatively less and therefore, a separate fund manager may not be required solely for overseas investment. Therefore, the current provision with respect to dedicated fund manager could be eased, the paper suggested.

Nomination procedures

Another key proposal was relaxing the nomination requirement for joint holders. As per current SEBI regulations, deadline for nomination/opting out of nomination for all the existing individual unit holders holding mutual fund units either solely or jointly, is June 30. The original deadline was September 30, 2023, that was extended on unitholders’ request.

“In case of jointly held folios, the surviving holder(s) in a jointly held folio takes precedence over nominee during transmission of units. Hence, the risk of unclaimed units/ fraud in such cases would be low,” SEBI paper said. Further, confirmation is needed from all holders regarding the nominee. In instances where all holders are not available at the same time to register their nominee(s), the process is put on hold, thereby causing considerable delay in such cases, according to the regulator.

Due to this procedural wrangle, the SEBI working group has recommended that the requirement of nomination may be made optional in case of jointly held folios.

Additionally, SEBI has also suggested changes to simplify rules for passive funds like exchange-traded funds (ETFs) and index funds. Currently, these funds face restrictions on investing in sponsor group companies, with a maximum cap of 25 per cent of net assets. Additionally, no single stock in a sectoral or thematic index-based passive fund can have more than a 35 per cent weight, per current rule.

Recognising that certain sectoral indices may have single issuers with over 25 per cent exposure, SEBI paper has suggested relaxing this limit for investments in sponsor group companies. This adjustment allows funds to invest based on the weight of constituents in the underlying index, reducing tracking errors.

Easy for passive funds

For equity-oriented ETFs and index funds based on widely tracked indices, SEBI has proposed excluding them from investment limits in sponsor group companies. This change enables investments to align with the weight of constituents in the underlying index, helping passive funds closely mimic benchmark indices without unintended tracking errors, the paper said.

All the three proposals are steps in the right direction. Single fund manager norm will not only reduce cost for AMCs, but also help in quick decision making. Joint-holder investors will heave a sigh of relief on the proposed relaxation in nomination requirements as it simplifies the process by allowing the surviving member to become the nominee.

Removing the investment cap in sponsor company should also be welcomed, especially, at a time when passive funds are growing exponentially. The assets under management of passively managed mutual fund schemes at the end of December 2023 stood at ₹8.74 lakh crore, which accounted for 21 per cent of overall AUM. Industry players expect the share of passive funds to hit 35-40 per cent by 2027.

So, the move aiming to check tracking error will not only help investors but the industry as a whole.