Sebi Reviews Regulation 24 to Ease Restrictions on Mutual Fund Business Activities

What’s Happening?

• The Securities and Exchange Board of India (Sebi) is conducting a comprehensive review of Regulation 24, which governs the business activities of Asset Management Companies (AMCs).
• Manoj Kumar, Executive Director at Sebi, confirmed the development, indicating a potential policy shift.

Current Regulatory Framework

• AMCs are restricted from engaging in businesses that conflict with their core function: managing mutual funds.
• They must:
  • Seek Sebi’s approval to offer foreign fund consultancy.
  • Maintain strict separation (“hard walls”) between different fund accounts.

Rationale Behind Restrictions

• The primary aim is to prevent AMCs from prioritizing their own profits over investor interests.
• Regulations are intended to reduce conflicts of interest and ensure investor protection.

Why a Review is Needed

• Critics argue that the current rules may be too restrictive, limiting AMCs from:
  • Diversifying revenue streams
  • Leveraging their expertise in other financial services
• A more balanced approach may involve:
  • Enhanced disclosures about AMCs’ non-core activities
  • Allowing investors to make informed decisions about such engagements

Investor Risk Perspective

• The evolving view suggests that investors are aware of inherent risks and that over-regulation may stifle innovation and growth.
• A shift toward greater operational freedom with transparent disclosures could be a more pragmatic regulatory stance.