Sebi clears ambiguity on seed capital investment required for NFO

Sebi's Friday circular read that the investment shall be made in growth option of the fund and where growth is not available, it should be made in dividend re-investment option.

The Securities and Exchange Board of India (Sebi) issued a circular on Friday, clarifying that mutual funds (MFs) should prioritise the ‘growth option’, when investing the minimum seed capital in a new fund offer (NFO).

In a recent amendment, Sebi said that a fund house was required to “invest not less than 1 per cent of the amount raised in an NFO, or Rs 50 lakh (whichever is lower)” in an option specified by the MF’s board.

Industry players say this was open to interpretation and the fund house could use the dividend option, which would bring back the capital.

Sebi’s Friday circular read that the investment shall be made in the growth option of the fund, and in cases where growth is not available, it should be made in the dividend re-investment option.

“This move will ensure the asset management company’s commitment to a new fund through seed capital,” said a fund manager.

The circular added that only when both the growth and dividend reinvestment options were unavailable could the investment be made in the dividend option of the new fund.

Sebi’s Friday circular will come into force with immediate effect.