SEBI's New product Restrictions and Opportunities & Why

 

The Securities and Exchange Board of India (SEBI) has recently taken a significant step in the evolution of India's financial markets by introducing a new asset class known as the "Specialized Investment Fund" (SIF). This development, aimed at bridging the gap between traditional mutual funds and more exclusive Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs), has the potential to reshape investment strategies for a demographic of investors looking for higher risk and potentially higher reward opportunities within a regulated framework.  

One of the key ideas might have been to promote passive investments more since if India needs a higher allocation in the MSCI index India needs more allocation towards passive funds hence this is one of the asset classes which will help to do the same. Further, many unrecognised PMS modes have been developed under the RIA model where equity portfolios of Rs 5lakhs, Rs 10lakhs and so-called small cases have been sold as hot dogs in the last 4 years. Further keeping the expense ratio the same as Mutual Funds reduces the fear of pricing of the products being termed as expensive and the minimum ticket size of Rs 10 lakhs differentiates between the class of the investors who can do investments.  We might see a more active combination of investment options as the product maturity increases and preference grows up.

 Minimum Investment: The minimum ticket size for investing in this new asset class is set at ₹10 lakh. This threshold aims to attract investors with a higher risk appetite who have investible funds between ₹10 lakh and ₹50 lakh but are not looking to invest in Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs) which require much higher investments.

• Structure: The SIF can be structured as open-ended, closed-ended, or interval schemes, providing flexibility in terms of when investors can enter or exit their investments.
• Investment Strategies: This asset class allows for more aggressive investment strategies compared to traditional mutual funds. It includes opportunities for long-short equity funds and inverse Exchange-Traded Funds (ETFs), aiming to provide investors with the ability to hedge against market downturns or speculate on market declines.
• Regulatory Oversight: While offering flexibility, it remains under SEBI's regulatory oversight to ensure investor protection and transparency. The new asset class has specific rules regarding investments, like a higher single company exposure limit of 15% and up to 20% in single-issuer debt with board approval.
• Objective: One of the primary objectives of introducing this asset class is to curb the proliferation of unregistered and unauthorized investment schemes that often promise unrealistic returns. It aims to provide a regulated platform for riskier investments that were previously sought through unregulated avenues.
• Eligibility for AMCs: Only mutual funds with substantial assets under management (AUM) or those managed by experienced fund managers can offer these products, ensuring professional management and oversight.
• Taxation and Fees: There's an expectation that this new asset class might follow a similar taxation model to mutual funds, but the exact details were still under discussion as per the last updates.

Launching Investment Strategies

1. Procedure Compliance:
• Investment strategies must follow the same process as mutual fund schemes under Regulation 28.
2. Types of Strategies:
• Open-ended, Close-ended, or Interval strategies, with clearly disclosed subscription and redemption frequency.
3. Fees and Expenses:
• Must comply with Regulation 52 of mutual fund regulations.

 

Investment Restrictions

1. Debt Instruments:
• Single Issuer Limit:
• Not more than 20% of NAV in debt instruments (money market or non-money market) issued by a single issuer with an investment-grade rating.
• Can increase to 25% with prior approval from the Board of Trustees and the AMC Board.
• Exceptions:
• Government securities, treasury bills, and triparty repo.
2. Company Ownership:
• Specialized Investment Funds under all strategies cannot own more than 15% of a company’s paid-up capital with voting rights.
• If mutual funds already hold 10%, Specialized Investment Funds may acquire an additional 5% maximum.
3. Equity Instruments:
• No strategy can invest more than 10% of NAV in the equity shares or equity-related instruments of a single company.
4. REITs and InvITs (Real Estate and Infrastructure Investment Trusts):
• Total Investment: Not more than 20% of NAV.
• Per Issuer Limit: Not more than 10% of NAV.
• Total Ownership Across Strategies: Not more than 20% of units issued by a single issuer.
• Exceptions: Index funds and sector/industry-specific schemes.

 This initiative by SEBI is seen as a move to offer investors, particularly high-net-worth individuals (HNIs), regulated products that have higher risk-taking capabilities, filling the gap between mutual funds and PMS.  SEBI's introduction of the Specialized Investment Fund marks a pivotal moment in India's journey towards a more sophisticated financial landscape. It acknowledges the growing demand for diverse investment avenues and recognizes the need for regulation to accompany financial innovation. As this new asset class takes root, it will be crucial to monitor its impact on the market, ensure robust investor protection, and adopt regulatory measures to keep pace with the evolving financial environment. This move not only broadens the investment horizon for Indian investors but also signals SEBI's commitment to fostering a dynamic, secure, and inclusive financial market.