The Securities and Exchange Board of India (SEBI) has issued a consultation paper aimed at improving the deployment of funds raised by asset management companies (AMCs) during new fund offerings (NFOs). The document seeks public comment on proposed timelines regarding how quickly these funds should be allocated based on a plan’s asset allocation.

SEBI believes that AMCs should aim to deploy NFO funds within 30 working days from the date of award.

If this is not feasible, AMCs must document their reasons and submit them to their investment committee, which may extend the deadline by an additional 30 business days.

Purpose of the consultation document

SEBI’s main objective is to address the delays in fund deployment observed in some NFOs. Previous reviews have indicated that factors such as fund size and market volatility contributed to these delays.

Currently, there are regulations governing how long NFOs can remain open, but there are no specific rules dictating how quickly the funds raised must be invested in accordance with the stated objectives of the program.

Context and current regulations

Under existing regulations, AMCs have six months from final approval from SEBI to launch a scheme.

While many NFOs manage to deploy their funds efficiently, data from the last three financial years showed that some programs took more than 90 days to invest funds as required.

In fact, out of 647 NFOs, 603 completed an asset allocation in 30 days or less.

This consultation highlights the need for better defined timelines to ensure funds are deployed in a timely manner, thereby protecting investors’ interests.

Proposed changes

SEBI’s proposal includes several key points:

Deployment timeline: AMCs should aim deploy NFO funds within 30 working days from the date of award.

Consequences for non-compliance: If AMCs fail to meet specified deadlines, they may face restrictions, including:

• Prohibition on launching new projects until funds are properly deployed.
• Unable to impose exit fees on investors who withdraw after the 60-day grace period.
• Mandatory reporting of discrepancies to trustees at each stage.

Scope of regulation: These proposals will apply to all NFOs, excluding index funds and exchange-traded funds (ETFs).

Public Comments Solicited

SEBI invites public comments on these proposals by November 20, 2024.