SEBI wants mutual funds to deploy NFO proceeds within 30 days

The Securities and Exchange Board of India (SEBI) has released a consultation paper aimed at improving the deployment of funds collected by Asset Management Companies (AMCs) during New Fund Offers (NFOs). The paper seeks public comments on proposed timelines for how quickly these funds should be allocated according to a scheme’s asset allocation.

SEBI believes that AMCs should aim to deploy NFO funds within 30 business days from the date of allotment.

If this is not feasible, AMCs must document their reasons and submit them to their Investment Committee, which may extend the deadline by an additional 30 business days.

Objective of the consultation paper

SEBI’s main goal is to address delays in fund deployment observed in certain NFOs. Previous reviews indicated that factors such as the size of funds and market volatility contributed to these delays.

Currently, there are regulations governing how long NFOs can remain open, but there are no specific rules dictating how quickly the collected funds must be invested in line with the scheme’s stated objectives.

Background and current regulations

Under existing regulations, AMCs have a window of six months from SEBI’s final approval to launch a scheme.

While many NFOs manage to deploy funds efficiently, data from the last three financial years showed that some schemes took longer than 90 days to invest funds as required.

In fact, out of 647 NFOs, 603 achieved asset allocation in 30 days or less.

This consultation highlights a need for better-defined timelines to ensure funds are deployed in a timely manner, thus protecting investors’ interests.

Proposed changes

SEBI’s proposal includes several key points:

Deployment timeline: AMCs should aim to deploy NFO funds within 30 business days from the date of allotment.

Consequences for non-compliance: If AMCs fail to meet the specified timelines, they could face restrictions, including:

• Prohibition from launching new schemes until the funds are appropriately deployed.
• Inability to levy exit loads on investors withdrawing after the 60-day grace period.
• Mandatory reporting of deviations to trustees at each stage.

Scope of regulations: These proposals will apply to all NFOs, excluding Index Funds and Exchange Traded Funds (ETFs).

Public feedback invited

SEBI invites public comments on these proposals by November 20, 2024.

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