Sebi eases passive fund rule, allows higher exposure in sponsor group firms

This exposure would be subject to an overall cap of 35 per cent investment in the group companies of the sponsor

The Securities and Exchange Board of India (Sebi) has amended its regulations to allow equity-oriented Exchange Traded Funds (ETFs) and index funds to invest more in the listed securities of their sponsors’ group companies.

 

Sebi, in a notification on Tuesday, amended mutual fund rules to create a more level playing field for asset management companies (AMCs). The new regulation permits equity-oriented ETFs and index funds to invest in listed securities of sponsor group companies in line with their weightage in the underlying index, subject to an overall cap of 35 per cent of net assets.

 

Previously, mutual fund schemes were not permitted to invest more than 25 per cent of their net asset value (NAV) in the group companies of their sponsor. This restriction has now been relaxed for passive funds tracking widely followed, non-bespoke indices.

 

The step addresses a longstanding issue where some AMCs were at a disadvantage due to the 25 per cent investment cap. The restriction had made it challenging for passive funds to accurately replicate their underlying indices, particularly when sponsor group companies comprised more than a quarter of the index.

 

The decision was initially approved by Sebi's board in April. It aims to streamline norms and ensure fair competition among all AMCs. The move is expected to benefit those asset managers whose sponsor group companies have a significant presence in major market indices.

 

Industry experts believe this change will enhance the ability of passive funds to track their benchmark indices more closely, potentially improving their performance and attracting more investors.

 

Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited said, “ This change might lead to minor disadvantage for funds without sponsor companies. Currently, only 11 AMCs have associations with group companies of the sponsors and may be impacted by this rule change. Most of these sponsor companies aren't listed in India, so the immediate impact is limited."

 

“Additionally, if the need arises to invest in securities outside the benchmark, passive funds lose their essence. The Indian market is growing, and there is scope for alpha generation via active management, which investors should ideally explore,” he said.
 

The move is part of Sebi's efforts to refine regulations in the mutual fund industry, fostering growth and ensuring equitable opportunities for all market participants.