Sebi considers new product category between mutual funds and PMS

Sebi move aimed at filling product gap, curbing inflow into unauthorised investment schemes

The Securities and Exchange Board of India (Sebi) has proposed introduction of a new investment vehicle catering to investors willing to take risker bets on the market but for whom portfolio management services (PMS) schemes or alternative investment funds (AIFs) could be out of reach.

The regulator has mooted a minimum ticket size of Rs 10 lakh for this yet-to-be-named product category — much below the threshold of Rs 50 lakh for PMS and Rs 1 crore for AIFs. Meanwhile, the minimum investment size for mutual funds (MFs) can be as low as Rs 100.

“The proposed new asset class seeks to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size, aimed at curbing the proliferation of unregistered and unauthorised investment products,” Sebi has said in a discussion paper. “Over the years, a notable opportunity of a new asset class has emerged between MFs and PMS in terms of flexibility in portfolio construction,” it added.

Sebi believes absence of such a product has given an opening to unauthorised entities to lure investors with promises of unrealistically high returns.

The regulator has said the structure of the proposed asset class will be akin to MFs but it will be allowed to offer risker investment strategies. For instance, MFs are allowed to deal in the derivatives market only for the purpose of hedging. However, the new asset class will be permitted to have naked positions in the derivatives market. Similarly, various investment thresholds in debt securities, or REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) will be slightly more relaxed vis-à-vis MFs.

In the discussion paper, Sebi has proposed a clear differentiation of this new product and upfront disclosures of the risks involved, so that investors don’t confuse them with MFs.

“It is proposed to have a distinct nomenclature for the new asset class to distinguish it from traditional MFs and other investment products already available in the securities market such as PMS, AIFs, REITs and InvITs,” Sebi has said.

The regulator has mooted that the new asset class can be offered by existing asset management companies (AMCs) with a minimum of three years of track record and assets under management (AUM) of Rs 10,000 crore. Those not meeting these requirements too can apply, provided certain criteria are fulfilled. AMCs will have to appoint a chief investment officer with an experience of fund management of at least 10 years and managing AUM of not less than Rs 5,000 crore. Further, for the new asset class, an additional fund manager will be appointed. This additional fund manager must have experience of at least seven years, having managed AUM of Rs 3,000 crore.

Sebi has invited public comments on various aspects of the new product category until August 6.

The proposal comes at a time when more and more domestic households are channelising their savings into financial markets, lowering their reliance on traditional asset classes such as physical gold and real estate.

“India is finally opening up to different investment products, styles and approaches. Passive, factor, inverse exchange traded funds, alternatives, and more. There is no single way to invest,” Radhika Gupta, managing director and chief executive officer, Edelweiss AMC, wrote on X. “AMC businesses of the future will build multiple centres of expertise on a platform rather than a single style or individual driven business,” Gupta added.

Regulator proposes summary proceedings for faster action 

The Securities and Exchange Board of India (Sebi) is mulling steps to fasten the proceedings involving certain violations by intermediaries. The proposed provisions will be to deal with violations which are obvious in nature, are either accepted by the intermediary or need minimal documents or evidence such as non-submission of reports, lapse in payment of fee, or non-compliance of other mandates. The market regulator has proposed “summary proce­edings” for timely resolution or processing of such cases. “Summary proceedings offer an opportunity to the entity to provide its submissions on the reasons why facts on which the proceedings are initiated should not be concluded against him with adverse consequence,” said Sebi.