Sebi’s fixed timelines to address delays in NFO fund deployment

The proposal mandates asset management companies (AMCs) to allocate funds within 30 days of NFO closure, with a possible 30-day extension upon committee approval. 

The market regulator’s objective is to enhance transparency and safeguard investor interests by reducing fund idle time and ensuring alignment with stated asset allocations.

Why Sebi is setting a deployment timeline

Historically, delays in fund deployment have raised concerns, with investors expecting their contributions to be promptly invested according to each fund’s objectives. 

Sebi’s proposal aims to address these delays by establishing a deployment period of 30 business days, extendable by another 30 days in specific cases. 

During its review of AMC operations, the regulator found that certain NFOs faced deployment delays due to issues like volatile markets and large fund sizes, hindering efficient fund allocation. 

This timeline aims to eliminate prolonged holding periods, ensuring investors benefit sooner from market movements. It also reflects Sebi’s ongoing efforts to keep pace with the growth and dynamics of India’s mutual fund industry. The move seeks to boost accountability and set a benchmark for AMCs to incorporate into their strategic planning.

Sebi’s motivation behind a fixed timeline

The proposed timeline is part of Sebi’s broader agenda to strengthen mutual fund regulations, particularly for NFOs, where delays in fund deployment have caused investors to miss market opportunities. 

Sebi’s analysis of three years’ data shows that most funds managed to allocate assets within 60 days of an NFO’s closure, with over 90% achieving this within the first 30 days. This historical data supports the proposal for a 30-day initial timeline, extendable to 60 days, thus allowing AMCs some flexibility without compromising investor protection.

This fixed period prevents fund houses from retaining NFO proceeds for prolonged periods without deployment, ensuring funds are managed actively and efficiently. This also aligns Sebi’s policies with investor expectations for swift and disciplined fund management.

Factors contributing to deployment delays

Several factors contribute to delays in deploying NFO funds. These include high asset valuations in target markets, limited availability of securities with specific maturity profiles, and broader market dynamics. Geopolitical events or unexpected economic shifts can further impact deployment timelines as fund managers adjust strategies to protect investor assets. 

Recognizing these challenges, Sebi’s proposal includes a one-time extension option for AMCs. To receive an extension, an AMC must submit a justified request to its investment committee, which will review the market-based causes of the delay. 

The regulator has emphasized that such extensions should only be granted when liquidity issues or asset unavailability genuinely impede deployment. Additionally, it suggests that AMCs limit fund collections if suitable investment assets are overvalued or scarce.

Comparison with developed markets

Sebi’s proposed deployment timeline is unique to the Indian regulatory landscape, contrasting with practices in developed markets. In the US, the Securities and Exchange Commission (SEC) mandates thorough disclosure and regular reporting but does not impose a strict deployment period for NFO funds. This approach grants fund managers greater flexibility to align their strategies with market conditions without a fixed timeline. Regular disclosures ensure transparency without restricting fund managers’ ability to time investments strategically. 

Similarly, in the European Union, the European Securities and Markets Authority (ESMA) does not require specific timelines for fund deployment under its UCITS (Undertakings for Collective Investment in Transferable Securities) Directive. Instead, ESMA focuses on transparency, mandating periodic disclosures and rigorous investor communication. 

Sebi’s approach differs by prioritizing fixed deployment periods tailored to the expectations and regulatory needs of India’s growing mutual fund market, where structured timelines are seen as essential to reinforce investor trust.

Consequences for non-compliance

To ensure adherence, Sebi’s proposal outlines stringent consequences for AMCs that fail to meet deployment deadlines. AMCs may be barred from launching new schemes until they allocate NFO funds as per the scheme information document (SID). Additionally, they may be restricted from charging exit fees for investors choosing to redeem units due to delays. 

These measures underscore Sebi’s commitment to investor protection and set high accountability standards for fund managers.

Sebi’s commitment to investor protection

The proposed deployment timeline exemplifies Sebi’s ongoing mission to strengthen regulatory oversight in India’s financial markets. Over recent years, the regulator has introduced several initiatives to enhance transparency, accountability, and investor protection within the mutual fund industry. 

From stricter disclosure requirements to improved risk assessment frameworks, Sebi’s regulatory evolution aims to keep pace with the expanding Indian investor base and the complexities of modern financial markets.

Dr. Simarjeet Singh is an assistant professor at the Great Lakes Institute of Management, Gurugram. Dr. Hardeep Singh Mundi is an assistant professor at IMT, Ghaziabad. The views are personal.