Executive Summary:
This circular, issued by the Securities and Exchange Board of India (SEBI), outlines requirements for Asset Management Companies (AMCs) to invest a minimum percentage of their assets under management (AUM) in mutual fund schemes based on the schemes' risk value. This is to align the interests of AMCs with the unitholders. The provisions of this circular come into force on the date of applicability of the MF Amendment Regulations as referred to under para 1 of this circular. SEBI circular SEBI/HO/IMD/DF4/CIR/P/2020/100 dated June 12, 2020 stands rescinded from such date.
Key Points / Main Content:
* **Regulatory Context:**
* The circular is based on the SEBI Mutual Funds Second Amendment Regulations, 2021, notified on August 05, 2021.
* It refers to sub-regulation 16A in Regulation 25 of SEBI Mutual Funds Regulations, 1996.
* **Investment Requirements:**
* AMCs must invest a minimum percentage of AUM in their schemes based on risk value, as per the Annexure provided.
* The risk value is determined by the riskometer of the immediate preceding month.
* Investment must be maintained at all times until the scheme's tenure completion or winding up.
* **Review and Compliance:**
* AMCs must conduct quarterly reviews (except for close-ended schemes) to ensure compliance.
* Shortfalls based on the quarterly average AUM must be rectified within 7 days of the review.
* AMCs can withdraw excess investment after the review.
* **Funding and Net Worth:**
* AMCs can invest from their net worth, or the sponsor may fund the AMC.
* If temporary Mark to Market loss persists for two consecutive quarters, AMCs must make good the shortfall in the minimum net worth, certified by the statutory auditor.
* **Exemptions:**
* AMCs are not required to invest in ETFs, Index Funds, Overnight Funds, Funds of Funds schemes, and close-ended funds where the subscription period has closed as on date of coming into force of MF Amendment Regulations.
* **Existing Contributions:**
* Mandatory contributions already made by AMCs can be adjusted against the new investment requirements.
* **Reporting and Disclosure:**
* Trustees must monitor compliance, and any non-compliance must be reported in the Quarterly CTR and half-yearly Trustee Report.
* Details of investments by AMCs must be disclosed on the websites of AMCs and AMFI.
* **Effective Date and Rescission:**
* The circular comes into force on the date of applicability of the MF Amendment Regulations.
* SEBI circular SEBI/HO/IMD/DF4/CIR/P/2020/100 dated June 12, 2020 is rescinded from such date.
Impact Analysis:
* **Asset Management Companies (AMCs):**
* *Impact:* AMCs are required to allocate a portion of their assets under management into the very mutual fund schemes that they manage, based on the risk profile of those schemes.
* *Action Required:* AMCs must implement systems for calculating the minimum investment amount, conducting quarterly reviews, and making necessary adjustments. They must also ensure compliance is monitored and reported.
* **Trustees:**
* *Impact:* Trustees are responsible for overseeing the compliance of AMCs with the new investment requirements.
* *Action Required:* Trustees must monitor AMCs' compliance and report any non-compliance in the Quarterly CTR and half-yearly Trustee Report.
* **Unitholders:**
* *Impact:* The policy is intended to better align the interests of AMCs with those of the unitholders of mutual fund schemes.
* *Action Required:* No direct action is required, but unitholders can expect increased alignment of interests between the AMC and the performance of the fund.
* **Association of Mutual Funds in India (AMFI):**
* *Impact:* AMFI is responsible for disclosing details of investment by AMCs in each of their mutual fund schemes on its website.
* *Action Required:* AMFI must update its website to disclose details of investment by AMCs in each of their mutual fund schemes.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body for securities and financial markets in India. Issued the circular.
Asset Management Companies (AMCs): Entities responsible for managing mutual fund schemes and investments. The circular addresses alignment of their interests with unitholders.
Mutual Funds: Investment vehicles that pool money from multiple investors to purchase securities.
Securities and Exchange Board of India (Mutual Funds) Second Amendment Regulations, 2021: Legal regulations amended by SEBI, mandating AMCs to invest in mutual fund schemes based on risk.
SEBI Mutual Funds Regulations, 1996: The principal regulations governing mutual funds in India, referred to in the circular's amended regulations.
Association of Mutual Funds in India (AMFI): An industry association of mutual funds in India, involved in disclosing investment details by AMCs.
SEBI Circular SEBIHOIMDDF3CIRP2020197: SEBI circular dated October 5, 2020, which defines risk value assigned to the schemes.
Assets Under Management (AUM): The total market value of the investments that a mutual fund manages on behalf of its investors.
Circular
SEBI/HO/IMD/IMD-IDOF5/P/CIR/2021/624 September 2, 2021
All Mutual Funds
Asset Management Companies
Trustee Companies/ Board of Trustees of Mutual Funds
Association of Mutual Funds in India
Sir/Madam,
Subject: Alignment of interest of Asset Management Companies (‘AMCs’) with
the Unitholders of the Mutual Fund Schemes
1. Securities and Exchange Board of India (Mutual Funds) (Second Amendment)
Regulations, 2021 (‘MF Amendment Regulations’) was notified on August 05,
2021 (https://www.sebi.gov.in/legal/regulations/aug-2021/securities-and-exchange-
board-of-india-mutual-funds-second-amendment-regulations-2021_51695.html) and the
provisions of the said Regulations will come into force on the 270th day from the
date of notification.
2. As per the amended regulations i.e. sub-regulation 16(A) in Regulation 25 of SEBI
(Mutual Funds) Regulations,1996 (‘MF Regulations’), asset management
companies (‘AMCs’) are required to invest such amount in such scheme(s) of the
mutual fund, based on the risk associated with the scheme, as may be specified
by the Board from time to time.
3. Accordingly, it is decided that based on the risk value assigned to the scheme(s),
in terms of SEBI circular no. SEBI/HO/IMD/DF3/CIR/P/2020/197 dated October 5,
2020, AMCs shall invest minimum amount as a percentage of assets under
management (‘AUM’) in their scheme(s) as provided in the Annexure.
4. For the purpose of para 3 above:
a) The risk value of the scheme as per the risk-o-meter of the immediate
preceding month shall be considered.
b) The investment shall be maintained at all points of time till the completion of
tenure of the scheme or till the scheme is wound up.
c) AMCs shall, except in case of close ended scheme(s), conduct a quarterly
review to ensure compliance with the requirement of investment of minimum
amount in the scheme(s) which may change either due to change in value of
the AUM or in the risk value assigned to the scheme. Further, based on review
Page 1 of 3of quarterly average AUM, shortfall in value of the investment in scheme(s), if
any, shall be made good within 7 days of such review. AMC shall have the
option to withdraw any excess investment than what is required pursuant to
such review.
d) AMCs may invest from their net worth or the sponsor may fund the AMC to
fulfil the aforesaid obligations, if required. However, the AMCs shall be required
to make good the shortfall in the minimum networth to comply with the
requirement of the MF Regulations in case of sustenance of temporary Mark
to Market loss for two consecutive quarters. AMC shall ensure that such
temporariness of the Mark to Market loss is certified by the statutory auditor.
e) AMCs shall not be required to invest in ETFs, Index Funds, Overnight Funds,
Funds of Funds scheme(s) and in case of close ended funds wherein the
subscription period has closed as on date of coming into force of MF
Amendment Regulations.
5. The mandatory contribution already made by the AMCs in compliance with the
applicable MF Regulations shall not be withdrawn. However, such contribution can
be adjusted against the investment required by the AMC as per this circular.
6. The compliance of the provisions of this circular shall be ensured by the AMCs
and monitored by the Trustees. Any non-compliance in this regard, shall be
reported in the Quarterly CTR and half-yearly Trustee Report.
7. Details of investment by AMCs in each of their mutual fund scheme(s) shall be
disclosed on the website of AMCs and AMFI.
8. The provisions of this circular shall come into force on the date of applicability of
the MF Amendment Regulations as referred under para 1 of this circular. SEBI
circular SEBI/HO/IMD/DF4/CIR/P/2020/100 dated June 12, 2020 shall stand
rescinded from such date.
9. This circular is issued in exercise of powers conferred under Section 11 (1) of the
Securities and Exchange Board of India Act, 1992 and Regulation 77 of SEBI
(Mutual Funds) Regulations, 1996, to protect the interests of investors in securities
and to promote the development of, and to regulate the securities market.
Yours faithfully,
R. Anand
Deputy General Manager
Investment Management Department
Tel: 022 - 26449237
Email: anandr@sebi.gov.in
Page 2 of 3Annexure
Percentage of AUM to be invested in the scheme of Mutual Fund based on the risk
value of the respective scheme
Minimum percentage of
Risk Level as Per Risk-
Risk Value AUM
O-Meter
to be invested in scheme
≤ 1 Low 0.03
> 1 to ≤ 2 Low to Moderate 0.05
> 2 to ≤ 3 Moderate 0.07
> 3 to ≤ 4 Moderately High 0.09
> 4 to ≤ 5 High 0.11
> 5 Very High 0.13
*****
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