SEBI Tightens Rules on NFO Fund Deployment to Curb Mis-Selling

AMCs Must Deploy NFO Funds Within 30 Days

In a major regulatory shift, the Securities and Exchange Board of India (SEBI) has mandated that mutual funds must deploy funds raised through new fund offers (NFOs) within 30 business days from the allotment of units. The move aims to prevent asset management companies (AMCs) from collecting excessive funds that cannot be reasonably deployed and to curb potential mis-selling of mutual fund schemes.

New Compliance Requirements for Mutual Funds

According to SEBI’s February 27 circular, mutual funds must now:

• Specify achievable timelines for fund deployment in the Scheme Information Document (SID) of each scheme.
• Ensure deployment within 30 business days of unit allotment as per the scheme’s asset allocation.
• Justify delays in deployment to their Investment Committee, which can extend the timeline by an additional 30 business days if necessary.
• Investigate the root cause of delays before granting extensions, ensuring that such cases are monitored effectively.

Stronger Oversight by Trustees and Investment Committees

SEBI has also placed responsibility on trustees to ensure that AMCs deploy funds within the stipulated timeframe. If deployment delays occur:

• The Investment Committee must document the reasons for the delay in writing.
• If the delay extends beyond 30 business days, the committee must review efforts taken by the AMC and suggest corrective actions to prevent future delays.
• The committee should not ordinarily approve extensions if the assets for the scheme are liquid and readily available.

Consequences of Non-Compliance

If an AMC fails to deploy funds within both the initial and extended timelines, it will face strict penalties, including:

1. No fresh inflows – The AMC will be barred from accepting new investments in the scheme until deployment occurs as per the SID.
2. Waiver of exit loads – Investors will not be charged an exit load if they redeem their investments after 60 business days of non-compliance.
3. Mandatory investor notification – The AMC must inform all NFO investors about their option to exit without an exit load via email, SMS, or other communication methods.
4. Reporting obligations – The AMC must report deviations to trustees at every stage of non-compliance.

SEBI’s Rationale: Preventing Mis-Selling and Enhancing Transparency

This regulatory change is part of SEBI’s broader strategy to ensure that mutual fund investors’ money is utilized efficiently and in line with the stated objectives of the scheme. By enforcing stricter fund deployment rules, SEBI aims to:

• Discourage AMCs from raising excessive funds that remain idle or are invested in unintended asset classes.
• Prevent mis-selling of mutual fund schemes by ensuring that collected funds align with the fund’s investment strategy.
• Enhance investor confidence by ensuring greater transparency and accountability in mutual fund operations.

Impact on the Mutual Fund Industry

These changes will require AMCs to be more strategic in fund collection and deployment. While the move is expected to bring greater discipline and efficiency, it may also limit the flexibility of AMCs in deploying capital. Fund houses will need to:

• Carefully assess market conditions before launching NFOs.
• Enhance operational efficiency to meet the 30-day deployment deadline.
• Improve communication with investors regarding potential delays and exits.

SEBI’s new regulations reinforce its commitment to investor protection and market integrity. By imposing stricter fund deployment rules and penalties for delays, the regulator aims to prevent idle capital accumulation and ensure that AMCs operate with greater responsibility and efficiency. Mutual fund houses will now have to adopt a more structured approach to NFO fund utilization, ultimately benefiting investors through greater transparency and reduced risks.