SEBI Simplified Norms for Domestic Funds: Overview

SEBI Simplified Norms for Domestic Funds: Overview

Question : SEBI has recently simplified norms for domestic funds to manage offshore pooled assets. Discuss the conditions under which this regulatory body has dropped the 20-25 rule.

SEBI has dropped the 20-25 rule which needs a minimum of 20 investors and 25% cap in investment by an individual for funds from low risk foreign investors

• This has simplified the norms for domestic funds to manage offshore pooled assets

• According to existing norms, fund manager managing a domestic scheme is allowed to manage offshore funds based on 3 conditions:

- The first is that investment objective and asset allocation of domestic scheme and offshore fund will be the same

- The second condition requires at least 70% of the portfolio to be replicated across the offshore fund and the domestic scheme

- The third condition was the most restrictive and it states that offshore fund would be broad based with a minimum of 20 investors and no single investor holding greater than 25% of the fund corpus

- In the absence of this, a separate fund manager is needed for appointing for management of offshore funds

• In a recent notification, SEBI has said the 20-25 rule will not apply if funds managed are of Category 1 foreign portfolio investors/FPIs and Category II foreign portfolio investors which are appropriately regulating board based funds

• This regulation is known as the Securities and Exchange Board of India (Mutual Funds) Regulations, 2015.

• FPIs have been classified into 3 categories:
• Category 1and 2: Low risk foreign institutions including pension funds, mutual funds, banks, sovereign wealth funds, insurers, multilateral institutions and well regulated foreign entities such as portfolio managers

• Recent changes seek to address the challenges faced by local fund managers for the management of offshore pooled assets

• Introduction of FPI regulations have rationalised investment routes and monitoring of foreign portfolio investors

• They have also streamlined categories of overseas investors. The rule will not be applicable to funds managed by local fund managers in regard to Category I and/or Category II FPIs (Foreign Portfolio Investors).

Facts and Stats

• SEBI became a statutory body through legislation which was enacted on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

• SEBI is headquartered at Mumbai, and has Northern (New Delhi), Eastern(Kolkata), Southern (Chennai) and Western (Ahmedabad) Regional Offices.

• Controller of Capital Issues was the regulatory body prior to the formation of SEBI; it derived its authority from the Capital Issues (Control) Act, 1947.