Regulatory Landscape For Specialized Investment Fund: A New Asset Class

Regulatory Landscape For Specialized Investment Fund: A New Asset Class

The Securities and Exchange Board of India (“SEBI”) amended the SEBI (Mutual Funds) Regulations, 1996 (“Mutual Fund Regulations”) with effect from December 16, 2024, to allow for the establishment of a Specialized Investment Fund (“SIF”). The primary purpose of this amendment is to introduce a new asset class to bridge the gap between Mutual Funds (“MFs”) and Portfolio Management Services (“PMS”).

The SEBI had proposed the introduction of SIF as an asset class in July 2024, to cater to a class of sophisticated investors whose risk-return profile falls between that of MFs and PMS. The primary issue stemmed from the higher ticket size of PMS and Alternative Investment Funds as well as the relatively lower risk-taking capability of most MF schemes. In the absence of a suitable regulated product to meet the needs of these investors, some have been drawn to unregistered and unauthorized schemes or entities.

Accordingly, SEBI amended the Mutual Fund Regulations to extend the mutual fund framework to SIFs for better governance, risk mitigation, and investor protection. The SIF framework introduces specific eligibility criteria, restrictions on investments, and duties of Asset Management Companies (“AMCs”) and trustees, distinct from traditional MF schemes.

REGISTRATION AND APPROVAL REQUIREMENT FOR SIF

An SIF is essentially a mutual fund that is registered with SEBI and has been granted approval to establish a SIF. The eligibility criteria for a mutual fund to launch an investment strategy under the SIF along with the process for submitting an application, will be specified by SEBI in the coming days. An existing mutual fund is not required to establish a separate trust to launch any investment strategy under the SIF.

TICKET SIZE

The minimum investment threshold is INR 1 million across all investment strategies offered by the mutual fund under the SIF. However, this minimum investment requirement does not apply to accredited investors.

LAUNCHING OF INVESTMENT STRATEGY

The procedure for launching an investment strategy is the same as for any other scheme launched by a mutual fund. The AMC must seek approval from the trustees, and a copy of the offer document must be filed with SEBI along with the applicable fees as specified under the Mutual Fund Regulations. Currently, SEBI has not specified the investment strategies that may be launched by a SIF.

The investment strategies can be open-ended, close-ended, or interval strategies. The subscription and redemption frequency will be determined by the investment manager, tailored to the nature of the specific investment strategy, provided it is disclosed in the offer document.

The fees and expenses that can be charged for investment strategies launched under the SIF are the same as those applicable to other schemes under the Mutual Fund Regulations.

PERMISSIBLE INVESTMENTS AND RESTRICTIONS ON INVESTMENTS

All the assets and instruments permitted for investment by any scheme of a mutual fund are also permitted for a SIF under its investment strategies.

However, the new regulations impose certain restrictions on investments based on the nature of the instrument as well as the threshold limits for investment relative to the net asset value (“NAV”) of the investment strategy and the number of investee companies or issuers.

For investments in debt instruments of a single issuer that are rated not below investment grade by a credit rating agency, the cap is set at 20% of the investment strategy’s NAV. This limit can be extended to 25% of the NAV with the prior approval of the Board of Trustees and the Board of Directors of the AMC. However, Government Securities, treasury bills, and triparty repos on Government securities or treasury bills are exempt from this cap.

The maximum permissible investment in the equity capital of any company by a SIF, across all its investment strategies, is 15% of the paid-up capital of the company. This 15% limit includes the 10% limit for a mutual fund under all its schemes concerning investments made in the paid-up capital of a company. The cap on the investment made under an investment strategy by a SIF in the equity capital of a company in terms of its NAV is 10%.

For investments in units of Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”), the maximum permissible investment by a SIF, across all its investment strategies, in the units issued by a single issuer of REITs and InvITs is 20% of the units issued. This 20% limit includes the 10% limit for a mutual fund under all its schemes concerning investments made in the units issued by a single issuer of REITs and InvITs.

The overall cap on the investment made under an investment strategy of a SIF in the units of REITs and InvITs is 20% of its NAV, with a ceiling of 10% of its NAV in units issued by a single issuer of REITs and InvITs. Investments made in index funds or sector or industry specific schemes pertaining to REITs and InvITs are exempted from the aforementioned cap.

BRANDING OF SIF

It is the responsibility of the AMC to ensure that the SIF is distinctly identified and separate from the Mutual Fund to maintain clear differentiation between the offerings of the SIF and traditional mutual fund schemes. Branding and advertisement of SIF offerings must be done with adequate disclaimers to preserve this distinction. The AMC must also comply with guidelines regarding the use of the sponsor’s or AMC’s or mutual fund’s brand name, if any. The AMC is required to maintain a separate website for the SIF offerings.

The primary purpose of distinguishing the offerings of a SIF from the traditional mutual fund schemes, as noted in SEBI’s consultation paper, is to protect the reputation of the mutual fund and, in the broader context, to preserve investor trust and confidence in traditional mutual fund schemes, from any potential misconduct or failure in the performance related to the new asset class.

CONCLUSION

The introduction of the SIF provides investors with an additional avenue to construct their investment portfolios and helps diversify their holdings. The regulatory framework for SIF is a positive and welcome step, as it aims to ensure a transparent, and well-governed structure for a class of investors who are willing to take higher risks than those typically associated with mutual fund schemes. By setting clear eligibility and operational guidelines, SEBI seeks to promote investor confidence in this new asset class while seeking to mitigate risks and curbing the growth of unauthorized and unregistered investment schemes.