SEBI Mandates Mutual Funds to Deploy NFO Proceeds Within 30 Days of Allotment

The Securities and Exchange Board of India (SEBI) has regulated that the funds raised through NFOs (New Fund offers) must be deployed within 30 days from the date of allotment. This will ensure the timely receipt of funds by investors, increase overall liquidity and operational efficiency in the financial markets, and make it easier for fund managers to deploy the money in appropriate investment opportunities.

The Securities and Exchange Board of India (SEBI) has made it mandatory for asset management companies (AMCs) to deploy the money collected through new fund offers (NFOs) within 30 business days from the date of allotment of units. Currently, there is no time limit prescribed for the deployment of funds.

Effective 1 April 2025: The objective of this regulation is to ensure that AMCs raise only the capital that they can deploy within a reasonable time to prevent mutual fund mis-selling, protect the interests of investors, and maintain the integrity of the market.

Key Guidelines:

Time-Bound Deployment

AMCs must allocate the NFO funds within 30 business days.

In the event of a delay in deployment, the AMC must provide a written justification to its Investment Committee detailing the efforts to allocate needed funds. The justification should explain the steps and actions taken to ensure funds are distributed appropriately.

Extension in Exceptional Cases

The Investment Committee may extend the timeline by an additional 30 business days but will only do so after reviewing the reasons for the delay to understand the root causes and ensure any necessary adjustments or actions are taken to address them effectively.

No extension will be considered or granted where the scheme’s assets are liquid and available (that is, where the scheme’s assets are readily convertible into cash or other liquid assets and are available for immediate use)

Trustees’ Oversight and Compliance

The trustees will monitor the whole process of fund deployment, ensuring that it adheres to schedules and all applicable regulations. Monitoring and management of the process will be carried out meticulously to ensure that the process is efficient and adheres to guidelines.

Should the funds continue to remain un- deployed at the end of the extended timeline, the AMC will not be permitted to accept any new subscriptions in the scheme until the process of deployment is completed in full.

Investor Protection Measures

AMCs would not be allowed to charge exit load if the fund does not comply with its specified asset allocation for more than 60 business days.

Any alteration to the asset allocation plan must be reported to the Trustees at each stage of the process to maintain transparency and accountability and enable the Trustees to be kept informed about any changes that occur.

Managing NFO Fund Flows

Fund managers have the flexibility to change the NFO period (new fund offer period, excluding ELSS) depending on market conditions, asset availability, and deployment feasibility.

Preventing Mis-Selling

To ensure that distributors do not mis-sell in the case of switches between schemes of the same AMC, SEBI has mandated that the distributor commission shall be fixed at the lower of the rate of the two schemes in the case of a switch. This regulation ensures fair play in the financial market and prevents any misrepresentation or unfair dealings by the distributors.

AMFI will come out with comprehensive guidelines on this in consultation with the Securities and Exchange Board of India (SEBI). This will ensure that the guidelines are comprehensive, well-informed, and vetted thoroughly before they are put out.

The Securities and Exchange Board of India (SEBI) said it has taken this step after it observed significant delays in the deployment of NFO funds, which are often related to market conditions and the size of the funds. SEBI has also introduced a tight timeline and stringent compliance measures to increase transparency and efficiency in mutual fund investments.