New Sebi norms: SIFs to target wealthy investors with high-risk appetite

The Securities and Exchange Board of India (Sebi) has notified the so-called “specialised investment funds”, or SIF, and clarified the rules and regulations of this new asset class, which it conceptualised a few months ago. The SIF has been designed to offer an investment option midway between a portfolio management scheme (PMS) and “vanilla” mutual funds (MFs). Asset-management companies (AMCs) can use these instruments to offer high-risk, high-return trading strategies to sophisticated investors who possess the requisite risk appetite and financial capacity. The minimum investment value is Rs 10 lakh, which is less than the minimum Rs 50 lakh threshold for the PMS, though accredited investors can invest less. AMCs launching these schemes would have to appoint chief investment officers with at least 10 years’ experience in managing assets worth at least Rs 5,000 crore, and additional fund managers with at least seven years’ experience handling at least Rs 3,000 crore. The AMC itself must have been in operation for at least three years, with assets of at least Rs 10,000 crore.

 

The regulator has laid down a few investing rules and regulations for this strategy. The new product line may have offers across open-ended, close-ended, and interval investment strategies. The list of permissible strategies will likely be announced by Sebi later. A few limits have been set out by the notification. No SIF can allocate more than 20 per cent of its net asset value (NAV) to debt instruments issued by a single issuer. However, the 20 per cent rule would be waived if the SIF invests in government securities. This limit can be extended to 25 per cent with approval from the board of trustees and the AMC’s board of directors. Further, SIFs can’t invest more than 15 per cent of the company’s paidup capital with voting rights. And neither can they put in more than 10 per cent of their NAV in equity shares of any company. When it comes to real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), SIFs can invest up to 20 per cent of their assets in these instruments but no more than 10 per cent in any single Reit or InvIT.

 

Sebi has further directed AMCs to clearly distinguish SIFs from MFs through branding, advertising, disclaimer guidelines, and maintaining separate websites for the new asset class. The expense structure is roughly equivalent to that permitted for MFs. The maximum fee that can be charged by MFs is determined by the size of the fund. For equity schemes up to Rs 500 crore, the maximum chargeable expense has been capped at 2.25 per cent of the assets under management (AUM). The cap reduces as AUM increases. SIFs will allow AMCs to tap wealthy individuals and families with comparatively high surplus funds to invest and willingness to bear the extra risks. This class of investor is generally targeted by PMS. SIFs have a degree of flexibility that enables AMCs to compete with PMS but the houses would have to work out features that make SIFs more attractive than PMS. They would also have to do their internal assessments and work out what sort of schemes would be financially lucrative enough to make it worthwhile to enter this space. Sebi has done well to frame the SIF, which will fill a gap for relatively wealthy investors. MFs have played an important role in building the equity culture in India and channelising savings into productive investments. For SIFs, a lot will depend on performance in the initial few years.