Sebi's new asset class below PMS threshold a good move
This category would be introduced under the MF structure, with relaxations in prudential norms to be adequately effective
image for illustrative purpose
Most often people misconstrue the role of a regulator to be limited to just regulation or stipulations. They do that as part of the risk management while simultaneously allowing for innovation. The recent announcement from the SEBI (Securities Exchange Board of India) has one such effect. It’s been a few years since the regulator has hiked the minimum threshold for investing in Portfolio Management Services (PMS) to Rs50 lakh from the earlier limit of Rs25 lakh.
Ever since there has been a tremendous increase in the market participation by the public, particularly post pandemic. The number of mutual fund (MF) folios or opening of new demat accounts has outstripped every earlier statistic. Equally, the investors have benefited from the equity market gains through their exposures. So, the release of consultation paper on creation of New Asset Class, a new category of investment below the PMS threshold is welcomed. The paper solicits comments to the proposal of this new product category, aimed at bridging the gap between MF and PMS in terms of flexibility in portfolio construction. The proposed New Asset Class (NAC) seeks to provide investors with a regulated investment product featuring higher risk-taking capabilities and a higher ticket size, aimed at curbing the proliferation of unregistered and unauthorised investment products.
The new category is envisaged to have a risk-return profile between MF and PMS while maintaining consummate safeguards and risk mitigation measures. This category would be introduced under the MF structure, with relaxations in prudential norms to be adequately effective. Such relaxations would enhance the risks associated and the same is being mitigated by putting a higher limit on minimum investment size. The single issuer limit for debt securities is 20 per cent of NAV (Net Asset Value) with an additional 5 per cent on approval of trustees and AMC board unlike the 10 per cent and 2 per cent respectively for MF. Credit risk based single issuer limit for debt securities is as follows: AAA-20 per cent of NAV, AA-16 per cent, A and below at 12 per cent of NAV with an additional 5 per cent after approval of trustees and AMC board.
15 per cent of NAV is allowed in equity and equity related instruments of any company with 25 per cent in a particular sector. The single issuer limit in REIT and InvITs at 20 per cent of NAC across all investment strategies. Two routes of eligibility criteria are proposed where 1) MF shall be in operation for minimum of three years with an average Assets Under Management (AUM) of not less than Rs10,000 crore in the preceding three years and 2) No action initiated or taken against the sponsor/AMC under section 11, 11B and/or section 24 of the SEBI Act during the last 3 years.
Those AMCs that’re not fulfilling the above criteria shall be eligible to launch the New Asset Class, subject to the following requirements. AMC shall appoint Chief Investment Officer (CIO) for this product with an experience of fund management of at least 10 years and managing AUM of not less than 5,000 crore and an additional fund manager for the category with experience of fund management of at least 7 years managing AUM of not less than 3,000 crore while the second condition in the earlier method remains on action taken by SEBI. The products offered under the NAC will be relatively riskier than the schemes offered by the traditional MF, so clear distinction in branding is necessary.
Thus ensuring that any potential misconduct/failure in performance of the NAC doesn’t result in brand contamination or negatively impacting the confidence and trust in the traditional MF. Investors may also have an option of systematic plans such as Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP) for these strategies under NAC. The structure of this category is offered under the pooled funds akin to the MF schemes. The redemption frequency of these ‘investment strategies’ can be tailored based on the nature of the investments to allow the investment manager to adequately manage liquidity without imposing undue constraints on investors. The units of these investment strategies may also be listed on the recognized stock exchanges particularly for those units with redemption frequency of greater than a week. At no point in time should the total invested amount of an investor fall below Rs. 10L due to systematic or withdrawal.
Only ‘investment strategies’ that are specified by SEBI from time to time can be launched under the NAC. For instance, Long-short Equity Fund and Inverse ETF/Fund. The former seeks to deliver returns by taking long and short positions in equity and related instruments. For example, the fund may be bullish on automobile sector and bearish on IT sector and may invest in both these sectors by going long on automobile and short on IT sector. The latter seeks to generate returns that are negatively correlated to the returns of the underlying index.
By taking a leaf out of liquid alternate /hedge funds in the US markets and Inverse Funds/ETFs and Bear Funds in Australia, the regulator is attempting to introduce this new category of investments to Indian market.
(The author is a partner at Wealocity Analytics, a SEBI registered Research Analyst and could be reached at [email protected])
