19-July-2024-Editorial

SEBI PROPOSES NEW ASSET CLASS BETWEEN MUTUAL FUNDS AND PMS

The Securities and Exchange Board of India (SEBI) has introduced a proposal to create a new asset class in the Indian investment landscape. This initiative aims to provide investors with a regulated investment option that allows for higher risk-taking and addresses the proliferation of unregistered investment products.

Proposed Asset Class

• Objective: The new asset class is designed to offer investors a regulated product with greater risk-taking potential, helping to bridge the gap between Mutual Funds (MFs) and Portfolio Management Services (PMS).
• Minimum Investment: The proposed minimum investment threshold is set at Rs 10 lakh per investor, targeting a higher ticket size compared to traditional investment options.
• Distinct Identification: SEBI plans to introduce a unique name for this asset class to clearly differentiate it from existing investment products like MFs, PMS, Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (INVITs).

Investment Strategies and Options

• Permitted Strategies: The new asset class may include investment strategies such as long-short equity funds and inverse Exchange-Traded Funds (ETFs). These funds are traded on stock exchanges like individual stocks and offer diverse investment opportunities.
• Systematic Investment Plans: Investors will have the option to use systematic plans, including Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs), for managing their investments under this new category.

Eligibility Criteria for Asset Management Companies (AMCs)

• Two Routes to Eligibility:

1. Established AMCs: Existing mutual funds that have been operational for at least three years and have an average Asset Under Management (AUM) of Rs 10,000 crore, with no regulatory actions taken against them in the last three years, can directly offer products in this new asset class.
2. New and Smaller AMCs: AMCs that do not meet the above criteria must appoint a Chief Investment Officer (CIO) with at least 10 years of experience and an AUM of not less than Rs 5,000 crore. Additionally, they need to hire a fund manager with a minimum of 7 years of experience and managing an AUM of at least Rs 3,000 crore.

Potential Benefits and Implications

• Regulated Product: The new asset class aims to provide a regulated investment option with higher risk-taking capabilities, addressing gaps left by traditional investment products.
• Filling the Gap: It is expected to bridge the investment gap between MFs and PMS, catering to the needs of investors looking for a higher-risk, higher-reward investment option.
• Strengthening MFs: By setting stringent eligibility criteria, the new asset class may enhance the role and reliability of established mutual funds and AMCs in the market.

Securities and Exchange Board of India (SEBI)

• Background: SEBI was established in 1992 under the Securities and Exchange Board of India Act, 1992, to protect investors and regulate the securities market in India. Its headquarters is in Mumbai, with regional offices in Ahmedabad, Kolkata, Chennai, and Delhi.
• Historical Context: Before SEBI’s formation, the Controller of Capital Issues regulated capital markets under the Capital Issues (Control) Act, 1947. SEBI was initially a non-statutory body but gained statutory powers through the SEBI Act of 1992.
• Governance: SEBI’s board includes a chairman and various full-time and part-time members. It forms committees to address current issues. The Securities Appellate Tribunal (SAT) was established to hear appeals against SEBI’s decisions and has the authority of a civil court. Appeals against SAT’s decisions can be made to the Supreme Court.

Conclusion

SEBI’s proposal for a new asset class represents a significant development in India’s investment landscape, aiming to offer a regulated, higher-risk investment option while addressing concerns about unregistered products.

This move is expected to enhance the role of AMCs, offer more investment choices to investors, and strengthen the regulatory framework governing investments.