India’s capital markets regulator has proposed reducing the window for the deployment of new fund offer (NFO) proceeds to 30 days from the allotment in a consultation paper released on Wednesday.
The Securities and Exchange Board of India (Sebi) clarified that if AMCs fail to meet the deadline without seeking an extension, they will be prohibited from launching new schemes until the funds are deployed, and they will also not be able to levy exit loads on investors withdrawing after the 60-day grace period.
The Sebi paper follows the regulator’s observations that asset management companies (AMCs) were delaying deploying funds raised during the NFOs due to the large size of the funds or market volatility, among other reasons.
To be clear, at present, AMCs can take up to six months to launch a scheme from the day Sebi issues the final observations. The underlying assumption is that AMCs would open the NFO at the most opportune time when market conditions are favourable for making investments based on the asset allocation prescribed in the Scheme Information Document (SID).
Further, Sebi regulations require NFOs to remain open for a minimum of three working days and not more than 15 days (except for equity-linked savings schemes).
Sebi’s analysis of NFOs over the last three fiscal years, as mentioned in the paper, showed that for 603 out of the 647 NFOs, AMCs achieved asset allocation in less than 30 days from the date of unit allotment, as outlined in the Scheme Information Document (SID).
Additionally, 633 NFOs saw AMCs reach the specified asset allocation in under 60 days. This indicates that 98% of the NFOs launched in the past three fiscal years successfully met the asset allocation criteria in 60 days or less.
“Considering that most of the schemes achieved asset allocation in 60 days or less, having a time period of 90 business days for the deployment of the funds garnered in the NFO may not be in the interest of the investor,” the paper said.
The analysis of the data also showed that delays in deployment were due to high valuations in certain sectors, market dynamics, geopolitical uncertainties, and the unavailability of specific securities.
“Considering that the size of the corpus required to be deployed after NFO could be significantly large, suitable flexibility is required for the fund managers to deploy the funds according to his/her/their views on the market. However, the AMC should not retain the proceeds received through NFO for an indefinite period without deployment in the stated assets,” the paper noted.
Sebi discussed the issues with the Association of Mutual Funds in India (Amfi) and the advisory committee on mutual funds before seeking public comments. People can submit their feedback till 20 November.