Background and Key Features:
- The Securities and Exchange Board of India (“SEBI”) regulates the asset management and wealth management sector through a graded approach in relation to prudential, governance and investment norms, with flexibility given progressively, basis minimum investment threshold. This sector has also seen a significant rise in assets under management (“AUM”) over the last decade:
| Asset Class | Minimum Investment Threshold | Increase in AUM (2014 to 2024) |
| Mutual Fund (“MF”) | INR 500 | 6 fold increase (approx. INR 9.75 trillion to INR 61.6 trillion)[1] |
| Portfolio Management Services (“PMS”) | INR 50 lakh | 4 fold increase (approx. INR 7.68 trillion to INR 33.19 trillion)[2] |
| Alternative Investment Funds (“AIFs”) | INR 1 crore | 98 fold increase (approx. INR 0.11 trillion to INR 10.84 trillion)[3] |
- Since there is a significant gap in the minimum investment threshold of MF and PMS/ AIF products, SEBI has proposed to introduce a ‘New Asset Class’ (“NAC”)[4], “to fill the gap between MFs and PMS by offering a regulated product featuring greater flexibility, higher risk-taking capability and a higher ticket size, to meet the needs of the emerging category of investors”[5].
- NAC is proposed to be introduced under the MF structure[6], with distinct nomenclature to distinguish from traditional MF schemes[7]. All existing regulations for MFs will be applicable to NAC[8].
- Minimum investment threshold of INR 10 lakh[9] has been proposed.
- The registration process for NAC will be akin to the MF registration process, i.e., it will be a two-stage process, having in-principle and final approval stages[10].
- AMC will be able to offer ‘Investment Strategies’ under a pooled fund structure[11], akin to MFs. SEBI will specify ‘Investment Strategies’ that may be launched by AMCs (eg., Long-short equity fund, Inverse ETF)[12].
- Investment relaxations:
- NAC will be permitted to take exposure in derivates, other than for hedging purposes[13].
- Other relaxations such as increase in single issuer limit for debt securities (10-20% of net asset value), ownership of paid-up capital carrying voting rights (10-15%), etc., have also been proposed[14].
Considerations:
- Given the recent trend of SEBI implementing most of its consultation papers into regulations in this space, AMCs should expect NAC to be introduced over the course of this year.
- Upon introduction of NAC,
- AMCs will be required to apply to SEBI for approval for offering NAC products, with the similar process of in-principle and final authorisation, as is required for offering MF products.
- (i) Existing AMCs with less than INR 10,000 crore AUM in the preceding three years[15]; and (ii) new AMCs, will be required to appoint a Chief Investment Officer[16] (“CIO”) and an additional Fund Manager[17] for the NAC[18].
- If any action has been initiated against AMCs/ their Sponsors under Section 11, 11B, and/ or Section 24 of the SEBI Act, 1992, during the last three years, such AMCs will not be able to offer NAC products[19].
- As there are already many NAC eligible investors who are currently investing in traditional MFs (due to non-availability of alternate asset class), we may see reshuffling of AUM between traditional MF schemes and NAC.
- The number of retail investors in the equity futures and options (“F&O”) segment has increased manifold recently (from 7.1 lakh during financial year 2019 to 45.2 lakh in financial year 2022[20]), with over 89% of them facing losses[21]. Given the above, we may see retail equity F&O investors turn to NAC products to benefit from: (i) increased returns from derivatives; and (ii) professional management of their investments.
- Since NAC will require AMCs to hire personnel with expertise to handle riskier products, SEBI may consider increasing the total expense ratio for an Investment Strategy under NAC, vis à vis MF schemes.
- As NAC products will pose risks that differ from MF products (eg. exposure to derivatives), SEBI may provide for additional qualifications for mutual fund distributors distributing NAC products.
- Similarly, trustees of MFs may be given additional supervisory authority with respect to NAC products, and SEBI may prescribe norms for trustees (such as experience or certification criteria), to ensure that they understand the risks involved in NAC products.
[1] https://www.amfiindia.com/indian-mutual
[2] SEBI | Assets Managed by Portfolio Managers – Archive
[3] SEBI | Data relating to activities of Alternative Investment Funds (AIFs)
[4] SEBI’s Consultation Paper on Introduction of New Asset Class/ Product Category’, dated July 16, 2024 (“New Asset Class Consultation Paper” available here).
[5] Paragraph 2.6, New Asset Class Consultation Paper.
[6] Paragraph 2.5, New Asset Class Consultation Paper.
[7] Paragraph 2.7, New Asset Class Consultation Paper.
[8] Paragraph 4.5, New Asset Class Consultation Paper.
[9] Paragraph 7.1, New Asset Class Consultation Paper.
[10] Paragraph 4.3, New Asset Class Consultation Paper.
[11] Paragraph 6.1, New Asset Class Consultation Paper.
[12] Paragraph 6.7, New Asset Class Consultation Paper.
[13] Paragraphs 8.2 and 10, New Asset Class Consultation Paper.
[14] Paragraph 9, New Asset Class Consultation Paper.
[15] Paragraph 3.2.1, New Asset Class Consultation Paper.
[16] Experience requirements – experience of at least 10 years and managing AUM of not less than 5,000 crores.
[17] Experience requirements – experience of at least 7 years and managing AUM of not less than 3,000 crores.
[18] Paragraph 3.3.1, New Asset Class Consultation Paper.
[19] Paragraphs 3.2.2 and 3.3.2, New Asset Class Consultation Paper.
[20] Section II, SEBI’s ‘Study – Analysis of Profit and Loss of Individual Traders dealing in Equity F&O Segment’, dated January 25, 2023 (“F&O Study” available here).
[21] Observations, Chart A.1.1, F&O Study.
