SEBI Proposes Relaxation of Broad-Basing Norms for Mutual Funds

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing relaxation of the broad-basing requirement for pooled investment funds, following representations by the Association of Mutual Funds in India (AMFI) and other industry stakeholders.

What Are Non-Broad-Based Funds?

• Funds with fewer than 20 investors or where one investor holds more than 25% of the corpus.
• Previously, SEBI regulations favored broad-based funds to mitigate risks related to preferential treatment or insider dealings.

Key Proposals by SEBI

• Advisory Services via Separate Unit
  • AMCs will be allowed to offer advisory services to pooled funds (with fewer than 20 investors or a single investor holding over 25% of the corpus) through a distinct and ring-fenced unit with dedicated personnel and separate infrastructure.
• Target Funds
  • Covers pooled non‑broad‑based funds, including offshore institutional funds and family-office structures that didn’t qualify as broad-based.
• Governance & Conflict Safeguards
  SEBI’s proposal includes:
  • Defined trade allocation and disclosure policies
  • Bans on performance-linked fee structures
  • Adherence to insider-trading norms
  • Operational segregation to prevent conflicts between mutual fund operations and advisory services
• Expanded Ancillary Services
  • AMCs and their subsidiaries may also:
    • Serve as global distributors of their investment vehicles
    • Act as Points of Presence (PoP) for pension schemes (in compliance with PFRDA guidelines)
    • Undertake fund distribution and marketing activities aligned with fund management

Why It Matters

• Business Expansion: Facilitates entry into institutional advisory and structured products
• Investor Choice: Allows high-net-worth individuals, family offices, and foreign partners to access AMC expertise
• Regulatory Balance: Ensures investor protections and market integrity while enabling AMCs to diversify

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