SEBI Revises Passive Fund Norms to Level Playing Field

The Securities and Exchange Board of India (SEBI) has updated regulations for mutual funds, allowing equity-oriented ETFs and index funds to invest beyond the previous 25% limit in sponsor group companies. This move aims to create fair competition among asset management companies by enabling better replication of underlying indices.

The Securities and Exchange Board of India (SEBI) has introduced significant changes to the norms governing passive funds, such as index funds and Exchange Traded Funds (ETFs). This move aims to ensure a level playing field for mutual funds with regard to their exposure to the securities of sponsor group companies.

Announced in a notification on Tuesday, the revised rules will allow equity-oriented ETFs and index funds to invest beyond the earlier restriction of 25% of net assets in the securities of group companies of the sponsor. Previously, mutual fund schemes were restricted to this 25% limit, placing certain Asset Management Companies (AMCs) at a competitive disadvantage.

This regulatory change was approved by SEBI's board in April and is designed to enable equity passive schemes to better replicate their underlying indices. The new rules include an overall cap, permitting up to 35% investment in sponsor group companies, thereby attempting to balance flexibility and risk.

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