Sebi proposes major relaxations for AMCs to advise, manage non-broad-based funds — 5 key points

The Securities and Exchange Board of India (Sebi), in a detailed consultation paper, has proposed to revamp Regulation 24(b) of the SEBI (Mutual Funds) Regulations, 1996, which governs what business activities asset management companies (AMCs) can legally undertake. The regulator has sought public comments by July 28, 2025, on allowing mutual funds to manage "non-broad-based funds," which if considered, will pave the way for them to expand beyond their traditional mutual fund mandates to offer services like acting as Points of Presence (POP) for pension schemes and become global distributors for their funds.

1. What’s new?

Sebi's proposal, relaxing norms for AMCs to serve pooled non-broad-based funds, could provide an opportunity for the fund houses to expand their business. In this backdrop, the regulator has decided to review and consider relaxing "the broad basing requirement and permitting" AMCs to serve pooled non-broad-based funds, subject to strong governance and regulatory controls.

Non-broad-based funds are investment funds with concentrated holdings. For example, a fund that may have a single investor who holds over 25% of the total corpus. If Sebi's proposals are approved, these could allow Indian AMCs to expand their business globally.

2. Why is it important?

Sebi says its current rules permit an AMC to provide management and advisory services to pooled assets that are broad-based. Those AMCs which want to provide management and advisory services to non-broad-based funds must obtain a PMS (portfolio management service) license.

Over the years, several AMCs have highlighted that the broad-basing requirement has proven to be a barrier and does not provide a level playing field to AMCs of MFs vis-à-vis other intermediaries engaged in providing management and advisory services to non-broad-based funds.

For them, there are opportunities related to the management and advisory of pooled assets, wherein the domain expertise is available with the AMCs, but restrictions due to the broad-basing criteria do not permit AMCs to take up such mandates.

3. What are potential roadblocks?

In case the broad-basing requirement is relaxed, Sebi says conflicts like differential fees for pooled non-broad-based funds and diversion of resources, risk of contrary trade positions and front-running, risk of trading based on inside information of Mutual Fund operations, and inter-business transfer of assets on unfavourable terms to mutual fund investors could arise.

4. What are possible solutions?

To address these, the regulator has proposed differential fees for pooled non-broad-based funds and diversion of resources, with a cap on fee differential; a ban on performance-linked fees for such funds; replication of minimum 70% of portfolio value will be considered as adequate for said compliance, provided the AMC has a written policy for trade allocation; disclosure of performance and fee structures; and review by the unit holder protection committee.

To curtail the risk of trading based on inside information of mutual fund operations, Sebi says its PIT Regulations would prohibit entities from acting or dealing in securities based on Unpublished Price Sensitive Information (UPSI). Further, they may be required to ensure the activity performed for pooled non-broad-based funds does not emanate from any information obtained through MF operations. To avoid any transfer of securities to or from a mutual fund scheme on unfavourable terms, Sebi proposes that the transfer of securities between pooled non-broad-based funds and mutual fund schemes may not be allowed.

5. What are Sebi's four key consultation points?

• Is relaxing the broad-based rule appropriate?

• Are proposed safeguards sufficient?

• Should shared personnel and resources (like compliance officers) be allowed?

• What further disclosure/compliance measures are needed?