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News Topical, Digital Desk : Market regulator Securities and Exchange Board of India (SEBI) has issued a consultation paper on changes in the rules for asset management companies (AMCs). This proposal of the market regulator is related to the review of Rule 24 (b) of the Mutual Fund Regulation 1996, which aims to expand the business scope of AMCs.
SEBI has sought opinions from the general public, industry and experts through this consultation paper. Its objective is to make the mutual fund industry more flexible and protect the interests of investors.
What is in this consultation paper of SEBI?
SEBI has suggested changes in the mutual fund rules so that AMCs can get new business opportunities. Till now AMCs could provide services only to those funds which have at least 20 investors and the share of any one investor should not be more than 25%. This is called "broad-based fund".
SEBI now wants to simplify this rule so that AMCs can also provide services to funds with fewer investors (non-broad-based funds). This will increase the business of AMCs, but there may also be a risk of conflict of interest.
Why were the rules changed in 2011?
Earlier AMCs were allowed to provide many services like insurance, pension fund. But there was a possibility of injustice to investors due to different fee structures in different services. Therefore, SEBI tightened the rules and restricted AMCs to only broad-based funds.
Under this rule, there should be at least 20 investors in the fund and the share of any one person should not exceed 25%. Now SEBI is thinking of making this policy flexible again.
What is new in this proposal of SEBI?
1. Relaxation in broad-based rules
- Till now AMCs could provide services only to broad-based funds.
- Now SEBI wants AMCs to be able to provide services to non-broad-based funds (funds with fewer investors) as well.
- This will provide new business opportunities to AMCs, but strict rules will be implemented to avoid conflict of interests.
2. Sharing of resources
Currently, it is necessary for AMCs and their portfolio management services (PMS) units to keep separate employees and systems. For this, SEBI has suggested two options:
First option:- PMS services should be provided through a subsidiary of the AMC.
Second option:- PMS services should be provided by creating a separate unit within the AMC.
In both cases, the main employees and fund managers will be separate. The PMS head will have to report directly to the board. There will be freedom to share research, but there will be strict monitoring to reduce risk.
2. Expansion of business
The Association of Mutual Funds in India (AMFI) has suggested that AMCs should be allowed new services, such as:- Creating Point of Presence (POP) for pension funds and distributing funds globally. These services will be provided only through the subsidiaries of the AMC. No commission will be charged for this. Foreign funds will be only from those countries where FATF and IOSCO rules are applicable.
4. Investment through IFSC
To promote foreign investment through International Financial Services Centres (IFSC) like GIFT City in Gujarat, SEBI has proposed that the rules for broad-based and non-broad-based funds should also apply to IFSC funds. AMC subsidiaries will be able to provide pension fund services or distribute foreign funds, but strict rules will have to be followed for this. SEBI
has sought opinions from the general public, industry and experts on these four proposals:
- Should broad-based rules be relaxed?
- How to distribute resources between PMS and mutual funds?
- Should AMCs be allowed to offer additional services like pension fund POP and global fund distribution?
- Is there a need to change the rules for foreign investment through IFSC?
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