Sebi, the market regulator, mandated on Thursday that asset management companies deploy money raised from investors through new fund offers (NFOs) within 30 days of unit allotment.
Currently, there is no time limit for the deployment of funds.
The measure, which will be implemented on April 1, 2025, is aimed at encouraging AMCs to collect only as much funds in NFOs as can be deployed in a reasonable period of time and to discourage any mis-selling of NFOs of mutual fund schemes.
In a circular, Sebi asked AMCs to specify achievable timelines in the Scheme Information Document (SID) of a mutual fund scheme for the deployment of funds as per the scheme's specified asset allocation and to raise funds during the NFO accordingly.
"The AMC shall deploy the funds garnered in an NFO within 30 business days from the date of allotment of units," according to the statement.
In exceptional cases, if the AMC is unable to deploy the funds within 30 business days, it must provide written reasons to the AMC's investment committee, including details of efforts made to deploy the fund.
The committee can extend the timeline by 30 business days while also making recommendations on how to ensure future deployment within 30 business days and monitoring progress.
It would investigate the underlying cause of the deployment delay before approving a partial or full extension.
"The Investment Committee shall not ordinarily give part or full extension where the assets for any scheme are liquid and readily available" , Sebi commented.
According to Sebi, Trustees will be in charge of monitoring the deployment of funds collected through NFOs and taking steps to ensure that the funds are deployed within a reasonable timeframe.
Furthermore, AMCs will not be permitted to levy exit loads on investors exiting such scheme(s) after 60 business days of failing to comply with the scheme's asset allocation, and will report any deviations to Trustees at each stage.
The move came after Sebi discovered that there was a significant delay in the deployment of funds collected through NFO. The delay was attributed to both the size of the funds collected and market volatility.
To effectively manage fund flows in NFO, the fund manager can extend or shorten the NFO period (except for Equity Linked Savings Scheme or ELSS), based on his view of market dynamics availability of assets and his ability to deploy funds collected in NFO.
To discourage mis-selling of mutual fund schemes by mutual fund distributors in the case of a switch transaction to NFO of a regular plan of mutual fund scheme from an existing scheme managed by the same AMC, Sebi stated that the AMC must ensure that the distribution commission paid is lower than the commissions offered under the two switch transaction schemes.
The industry body AMFI will specify detailed guidelines in this regard after consulting with Sebi.
