The Securities and Exchange Board of India (SEBI) has issued a consultation paper seeking public comments on a proposal to introduce a new financial product (New Product) that would be a cross between mutual funds and portfolio management services (PMS).
What does SEBI hope to achieve with this New Product? Currently, we have in India, mutual fund schemes which are meant for the retail market, PMS with a minimum investment threshold of INR 50 lakhs and alternative investment funds (AIF) with a minimum investment value of INR 1 crore. SEBI intends to position the proposed New Product between mutual funds and PMS with the intention of greater flexibility, higher risk-taking capability and a higher ticket size.
The proposed new product will have the following features:
All registered mutual funds fulfilling specified criteria shall be eligible to launch the New Product. To be eligible, the mutual fund shall be in operation for minimum of 3 years and have average asset under management (AUM) of not less than INR 10,000 crores, in the immediately preceding 3 years. Mutual funds, not fulfilling the aforementioned requirements shall also be eligible to launch the New Product if the mutual fund’s AMC has (i) a Chief Investment Officer (CIO) for the New Product with fund management experience of at least 10 years, managing AUM of not less than 5,000 crore, and (ii) an additional Fund Manager for the New Product with fund management experience of at least 7 years, managing AUM of not less than 3,000 crore.
The registration process for the New Product shall be a two-stage process, consisting of in-principle and final approvals, similar to the registration process currently followed for mutual funds.
All provisions of existing SEBI (Mutual Funds) Regulations, 1996, SEBI Master Circular for Mutual Funds and any other circular issued by SEBI that is directed towards mutual funds shall apply to the New Product, unless otherwise specified.
Only ‘Investment Strategies’ that are specified by SEBI from time to time, can be launched under the New Product. The consultation paper has provided two examples of investment strategies that may be permitted.
The minimum investment amount for investment under the New Product shall be INR 10 lakh per investor. This means an investor must invest a minimum of INR 10 lakh, across one or more investment strategies, under the New Product offered by a mutual fund. At no point in time should the total invested amount of an investor fall below INR 10 lakh due to actions of the investor such as withdrawals or systematic transactions etc. However, the total amount may fall below INR 10 lakh due to depletion of the value of investments.
All investments permissible to mutual funds under the SEBI (Mutual Funds) Regulations, 1996 shall be available for the New Product. Additionally, the New Product shall be entitled to invest in derivatives for purposes other than hedging and portfolio rebalancing. The cumulative gross exposure to derivatives should not exceed 100% of the net assets of the investment strategy. The total exposure through exchange traded derivative instruments shall not exceed 50% of the net assets of an investment strategy.
The New Product shall not borrow for the purpose of investments except to meet temporary liquidity needs for repurchase, redemption of units or payment of interest or dividend to the unitholders, as currently permitted in the case of mutual funds.
SEBI wishes to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size, aimed at curbing the proliferation of unregistered and unauthorized investment products. However, all regulations applicable to mutual funds will apply to the new product, in order to ensure a consistent regulatory approach and investor protection measures.
Since the New Product will be relatively riskier than the schemes offered by traditional mutual funds, SEBI wishes to maintain a clear distinction between the branding of the New Product and traditional Mutual Funds. Towards this end, SEBI wants the New Product to have a brand or logo that is distinct from that of the mutual fund house which has launched the New Product. The distinction in branding may be made, for example, through the use of specific nomenclature and disclaimers in advertisements of products under the New Asset Class. Such distinct branding will also ensure that any potential misconduct/ failure in performance of the New Product does not result in brand contamination or any negative impact on the confidence and trust in the traditional mutual funds.
At first blush, the New Product appears to be an excellent idea by SEBI, which will cater to investors who cannot afford to invest in an AIF or have a PMS, but wish to be more aggressive in the market than mutual funds currently allow them to be.
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