On February 27, 2025, the Securities and Exchange Board of India (SEBI) issued a new circular outlining the timelines and procedures for the deployment of funds collected by Asset Management Companies (AMCs) in New Fund Offers (NFOs). These updated guidelines are designed to ensure that AMCs deploy funds raised through NFOs in a timely manner, aligning with the asset allocation specified in the Scheme Information Document (SID). This move aims to curb mis-selling and enhance investor protection while promoting efficient fund management in the mutual fund industry.
Why the Change?
Over time, there have been concerns regarding delays in deploying the funds raised during NFOs. Such delays can lead to inefficiencies, create confusion for investors, and, in some cases, result in mis-selling of mutual fund schemes. To address these issues, SEBI has introduced amendments to the SEBI (Mutual Funds) Regulations, 1996, mandating more stringent timelines for fund deployment. These changes are set to take effect from April 1, 2025.
Key Provisions of the New Guidelines
Timelines for Deployment: AMCs are now required to specify achievable timelines for deploying the funds raised through an NFO, clearly outlined in the SID. This ensures that the deployment process is transparent and that investors are aware of the expected timeframes for fund utilization. The funds raised during the NFO must be deployed within 30 business days from the date of allotment of units. If the AMC is unable to meet this deadline, they must submit a detailed written explanation, including the reasons for the delay and the steps taken to resolve the issue, to the Investment Committee.
Extension of Deployment Timeline: In exceptional cases where AMCs cannot deploy the funds within the specified 30 business days, the Investment Committee may grant an extension of an additional 30 business days. However, the committee must thoroughly assess the cause of the delay before approving any extension. The Investment Committee will also monitor the efforts to ensure future compliance with the timelines.
Trustee Oversight: The trustees of the mutual fund will be responsible for monitoring the deployment of funds in NFOs. They are expected to take necessary actions to ensure that funds are deployed within the stipulated timeframes.
Managing NFO Flows: The guidelines also allow fund managers to adjust the NFO period based on market conditions, asset availability, and their ability to deploy funds. However, this flexibility is subject to compliance with the regulations outlined in the Master Circular for Mutual Funds.
Discouraging Mis-Selling
SEBI’s amendments also target the issue of mis-selling in mutual fund schemes. To address this, the circular specifies that if an investor switches from an existing scheme to an NFO of the same AMC, the distribution commission paid will be the lower of the two commissions offered by the schemes involved in the transaction. This is intended to curb the practice of incentivizing distributors to mis-sell NFOs, ensuring that the focus remains on the suitability of the investment for the investor.
Moving Forward: Implementation and Impact
The new regulations will come into force on April 1, 2025, and will be applicable to all NFOs moving forward. These guidelines will likely lead to greater transparency and discipline in the deployment of funds, improving the overall efficiency of the mutual fund industry.
By introducing these measures, SEBI aims to foster a more investor-friendly environment, ensuring that the funds raised during NFOs are promptly and effectively invested in line with the stated asset allocation. This, in turn, will help maintain investor trust in the Indian mutual fund market, encouraging more participation and supporting the sector’s growth.
