SEBI approves bold reforms to empower investors

March 29, 2023 - an action-packed day as the Securities and Exchange Board of India (SEBI) announced a series of reforms for the mutual fund industry in India. Here are the SEBI board meeting highlights:

New scheme category focused on ESG
One of the reforms was the introduction of a new scheme category focused on environmental, social, and governance (ESG) themes. Fund houses are now permitted to launch multiple schemes based on ESG-related factors. In a consultation paper issued last month, SEBI proposed five ESG sub-categories for mutual funds, including ESG impact investing schemes and ESG sustainable objectives schemes. Currently, fund houses can launch only one scheme per category, and ESG schemes are required to invest 65 per cent of their assets under management (AUM) in listed entities with assurance on business responsibility and sustainability report (BRSR) code.

Framework for corporate debt market development fund
SEBI also established a corporate debt market development fund (CDMDF) to act as a backstop facility for the purchase of investment-grade corporate debt securities during times of stress. Mutual funds will contribute to the fund, and access to the fund for selling securities during crises shall be in proportion to the contribution made to the fund at the mutual fund level. The CDMDF will be in the form of an alternative investment fund (AIF) and will raise funds based on a guarantee to be provided by the National Credit Guarantee Trust Company (NCGTC).

Self-sponsored AMCs and allowing PE players to start mutual fund operations
Additionally, SEBI allowed private equity (PE) players to set up shop and own mutual fund companies. In a consultation paper issued in January 2023, SEBI stated that PE or its manager should have at least five years of experience as a fund or investment manager and experience investing in the financial sector. This move may lead to new players entering the mutual fund industry or PE players buying out existing mutual fund players. The regulator also announced amendments that allow "self-sponsored AMCs" to continue the mutual fund business, providing the original sponsor with flexibility to voluntarily dissociate itself from the mutual fund without requiring a new and eligible sponsor.

Strengthening investor grievance redressal mechanisms
SEBI also approved proposals to strengthen the investor grievance redressal mechanism in the securities market. This includes the harnessing of Online Dispute Resolution (ODR) mechanisms for investors across registered intermediaries and regulated entities. The market infrastructure institution (MII) administered conciliation and arbitration mechanisms will be extended to registered intermediaries or regulated entities and their investors. Currently, MIIs are stock and commodities exchanges and depositories.

Reforms for mutual funds investing overseas
Finally, in another circular, SEBI modified the timelines for the declaration of the net asset value (NAV) of international schemes due to differences in time zones and market hours. International schemes investing at least 80 per cent of total assets in permissible overseas investments will now have a timeline of 10 am on T+1 day instead of the existing timeline of 11 pm on T day. T day is the date of investments in mutual fund units in India. For investors in international stocks through exchange-traded funds (ETFs) or index funds, the net asset value (NAV) calculation will now be more accurate. Previously, if an investor had invested in a US-based index fund before the cut-off time on March 2, the applicable NAV would be disclosed by the fund house by 11 pm on the same day. However, since the US markets remain open until early morning the next day, this NAV reflected the portfolio value of the previous day (March 1).

With SEBI's new ruling, the NAV can now be disclosed by 10 am on T+1 day, allowing for a more recent and precise NAV that reflects the March 2 closing price. Additionally, if the schemes are still unable to disclose the NAV by the latest prescribed time due to their inability to capture same-day valuations, SEBI has requested that they disclose the time of the NAV in their SID (scheme information document) along with the reasons for delayed disclosure.The provisions of this circular will take effect from July 1, 2023.