SEBI Allows Passive Funds To Invest In Listed Securities Of Sponsor's Group Companies Beyond 25%

Markets regulator Sebi has streamlined norms for passive funds - index funds and Exchange Traded Funds (ETFs) - pertaining to exposure to securities of group companies of the sponsor to facilitate a level playing field for mutual funds.

In a notification on Tuesday, the Securities and Exchange Board of India (Sebi) has amended mutual fund rules, whereby equity-oriented ETFs and index funds can now invest in the listed securities of group companies of the sponsor beyond 25 per cent of the net assets.

Earlier, mutual fund schemes were not allowed to invest more than 25 per cent of their net asset value (NAV) in group companies of the sponsor.

This has restricted passive funds from effectively replicating the underlying index, in cases where group companies of sponsors comprise more than 25 per cent in the index.

This has put such asset management companies (AMCs) at a relative disadvantage compared to other AMCs who may not have a sponsor group company comprising over 25 per cent in the underlying index.

To streamline the norm and create a level playing field for all AMCs, Sebi's board in April approved the amendment to mutual fund rules to allow equity passive schemes to take exposure up to the weightage of the constituents in the underlying index.

This exposure would, however, be subject to an overall cap of 35 per cent investment in the group companies of the sponsor, Sebi had stated.