Sebi tightens rule for 'passive breaches' by MFs, effective July 1

Provision for barring fund houses from launching new schemes, charging exit load

The Securities and Exchange Board of India (Sebi) has tightened rules around rectification and reporting of ‘passive breaches’ by mutual fund (MF) schemes. A passive breach is when a scheme’s asset allocation inadvertently deviates from that mentioned in its scheme information document (SID). This could happen because of large-scale redemptions or sharp fall in the price of security where the scheme has a large exposure.

In a circular, Sebi has said all MF schemes, other than index funds and exchange traded funds, will be given 30 days to rectify any passive breaches. If it fails to do so, the fund management team will have to give a justification in writing, including details of efforts taken to rebalance the portfolio, to the investment committee (IC). The IC then can extend the timeline to up to 60 days.

If the fund house fails to meet even the extended deadline, it will be barred from launching any new scheme till the time the portfolio is rebalanced.  Further, it will not be allowed to levy exit load, if any, on the investors exiting such schemes.

The regulator has also increased the disclosure requirements for passive breaches. Under the new norms, the fund house has to report any deviation to its trustee at each stage. Also, inform investors immediately if the deviated portfolio is more than 10 per cent of the scheme corpus.

The new rules will come into effect from July 1, 2022.