SEBI Proposes New Asset Class to Bridge Investment Gaps: A Comprehensive Overview

Introduction

The Securities and Exchange Board of India (SEBI) has proposed the introduction of a new asset class to fill the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS). This initiative aims to provide a regulated investment product with higher risk-taking capabilities and a higher ticket size, thus addressing the proliferation of unregistered and unauthorized investment schemes.

Objective

The primary goal is to solicit feedback on the proposed New Asset Class, which seeks to offer flexibility in portfolio construction, higher risk-taking capacity, and a regulated environment for investors.

Background

The investment management landscape in India has evolved significantly, with SEBI adopting a segmented risk-based approach to regulate various investment products. These products include:

• Mutual Funds: Retail-oriented with a low ticket size.
• Portfolio Management Services (PMS): Minimum investment of INR 50 lakhs.
• Alternative Investment Funds (AIFs): Minimum investment of INR 1 crore.

Despite these offerings, there remains a gap between MFs and PMS in terms of flexibility and investor needs. The absence of a product in this segment has led to the rise of unregistered and unauthorized schemes, often promising unrealistic returns and posing financial risks to investors.

Proposal for the New Asset Class

The proposed New Asset Class will:

• Fill the gap: Between MFs and PMS by offering greater flexibility and higher risk-taking capability.
• Be regulated: Under the Mutual Fund structure, with necessary relaxations in prudential norms.
• Require a higher ticket size: To deter small retail investors and attract those with investable funds between INR 10 lakhs and INR 50 lakhs.

Eligibility Criteria

SEBI proposes two routes for Mutual Funds to offer the New Asset Class:

1. Strong Track Record Route:

   • Minimum 3 years of operation.
   • Average Assets Under Management (AUM) of at least INR 10,000 crores in the preceding 3 years.
   • No action against the sponsor/AMC under specific sections of the SEBI Act in the last 3 years.

2. Alternate Route:

   • Appointment of a Chief Investment Officer (CIO) with at least 10 years of fund management experience and AUM of not less than INR 5,000 crores.
   • An additional Fund Manager with at least 7 years of experience and AUM of not less than INR 3,000 crores.
   • No action against the sponsor/AMC under specific sections of the SEBI Act in the last 3 years.

Registration and Approval

• Application Process: Trustees/sponsor of a Mutual Fund must file an application with SEBI along with non-refundable fees and required documentation.
• Approval: SEBI will grant approval in two stages—initial and final, similar to the current process for Mutual Funds.

Branding and Structure

• Distinct Branding: The New Asset Class should have clear branding to distinguish it from traditional Mutual Funds, including specific nomenclature and disclaimers in advertisements.
• Investment Strategies: Offered under a pooled fund structure, similar to Mutual Fund schemes, with tailored redemption frequencies and listing options on stock exchanges.

Investment and Risk Management

• Minimum Investment Threshold: INR 10 lakhs per investor at the level of the New Asset Class within the AMC/MF.
• Permissible Investments: Includes all investments allowed for Mutual Funds, with additional exposure to derivatives for purposes other than hedging and portfolio rebalancing.
• Relaxations to Investment Restrictions: Adjusted limits for single issuer exposure, sector limits, and other investment restrictions to align with the higher risk profile of the New Asset Class.

Key Points to Keep in Mind

1. Investor Protection: Ensuring that the new asset class provides adequate safeguards and risk mitigation measures to protect investors.
2. Flexibility and Risk: Balancing the flexibility in portfolio construction with appropriate risk management practices.
3. Regulatory Framework: Maintaining a consistent regulatory approach while introducing necessary relaxations to enable higher risk-taking capabilities.
4. Market Impact: Assessing the potential impact on existing investment products and ensuring that the new asset class complements the current market offerings.

Conclusion

SEBI's proposal for a New Asset Class aims to bridge the investment gap between Mutual Funds and Portfolio Management Services by offering a regulated, higher-risk product with greater flexibility. This initiative seeks to curb the growth of unregistered schemes and provide a safer investment avenue for investors seeking higher returns.

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Article Compiled by:-

~Mayank Garg

+91 9582627751

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.