Passive mutual fund schemes cannot invest more than 25 per cent of their net assets in the listed securities of the sponsor's group companies, according to the new prudential norms notified by market regulator Sebi on Monday for such schemes.

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Sebi announced new measures to streamline the prudential norms applicable to investments by passively managed mutual fund schemes in the group companies of their sponsors.

The market regulator had constituted a working group to review the regulatory framework under Sebi (Mutual Fund) rules. Pursuant to public consultation on the recommendations of the working group in the Mutual Funds Advisory Committee (MFAC), Sebi decided to "streamline" the extant prudential norms, the regulator said.

In a circular issued on July 8, under the new framework, mutual fund schemes, excluding equity-oriented exchange-traded funds (ETFs) and index funds, are restricted from investing more than 25 per cent of their net assets in the listed securities of the sponsor's group companies.

For equity-oriented ETFs and index funds, investments in accordance with the weightage of the constituents of the underlying index, but are capped at 35 per cent of the net asset value of the scheme in the sponsor's group companies.

To ensure transparency, Sebi has defined "widely tracked and non-bespoke indices" as those with collective assets under management (AUM) of Rs 20,000 crore and above, tracked by passive funds or serving as primary benchmarks for active funds.

The Association of Mutual Funds in India (AMFI) will update and publish the list of such indices biannually, on April 15 and October 15, based on AUM data as of March 31 and September 30, respectively.

The first list of these indices, effective June 30, 2024, includes prominent indices such as Nifty 50, BSE Sensex, among others.

Passive schemes not aligned with these indices will be rebalanced within 30 business days from the date of issuance of this circular.

"In cases where the portfolios of such schemes are not rebalanced within this period justification in writing, including details of efforts taken to rebalance the portfolio will be placed before the Investment Committee of the AMC.

"The investment committee, if so desires, can extend the timeline for rebalancing up to 60 business days from the date of completion of mandated rebalancing period, the Securities and Exchange Board of India (Sebi) said in the circular.

In case the portfolios of schemes are not rebalanced within the period mandated plus extended timelines, Asset Management Companies (AMCs) will not be permitted to launch any new scheme till the time the portfolio is rebalanced and not levy exit load, if any, on the existing investors of such schemes, it added.