SEBI Mandates Mutual Funds to Deploy NFO Funds Within 30 Days
Sebi, the market regulator, stated that asset management companies must utilize the new fund offers that are collected from investors within thirty days after the date of unit allocation. This statement was released on a Thursday.
Currently, there aren’t any set restrictions when it comes to deploying funds.
Those measures, scheduled to be in effect as of April 2025, are there to prevent the over-collection of funds through NFOs and the incorrect selling of mutual fund schemes. AMCs are encouraged to collect only the necessary amounts that can be put to use in a reasonable time.
In mutual fund schemes, Sebi instructed AMCs to describe achievable deadlines on how the specified assets should be divided in the Scheme Information Document (SID). This will help in fundraising during the New Fund Offer (NFO).
“An NFO must have the funds deployed within 30 business days of unit allocation. The AMC plans to put this into action along with other measures,” he said.
However, if for some reason the AMC can not deploy the funds within 30 business days, they must provide a written explanation to the investment committee detailing why the utmost efforts to deploy the funds were not successful.
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The recommendation can specify an extension of up to 30 business days, while also outlining steps to ensure that deployment is done within 30 business days in the future and monitoring is done for the same.
Before granting approval for a part or full extension, it would investigate the reason behind the delay in the deployment before there is any approval.
Sebi further stated that “The Investment Committee shall not ordinarily give part or full extension where the assets for any scheme are liquid and readily available.”
Sebi added that the Trustees shall monitor the deployment of funds raised in NFO and ensure that the funds are deployed within an appropriate period of time.
If the funds are not utilized in line with the asset allocation as prescribed in the SID along with the increased timelines, then AMCs will not be able to receive new subscriptions in the same scheme until such time the funds are used in accordance with the asset allocation as prescribed in the SID.
Also, AMCs are not allowed to charge exit load to the investors who exit from such scheme(s) after 60 business days have expired without adhering to the asset allocation of the scheme and shall, if applicable, report to the Trustees at the appropriate levels.
This happened after Sebi noticed that there was one instance where deployment of the funds collected during the NFO was substantially delayed. This was due to the amount of funds raised being large and the unpredictability of the market being high.
To manage fund flows in NFO, Fund Managers also have the option of increasing or reducing the duration of the NFO period as they deem appropriate based on their assessment of the market, availability of assets, and readiness to utilize the funds raised during the NFO. (E.x. excluding E.L.S.S schemes.)
In order to reduce the possibilities of mutual funds schemes being incorrectly sold or mis-sold, especially with regards to switch transactions to NFO of mandatory versus non-ordinary plans of mutual funds controlled by the same AMC, Sebi proposed that the acceptance of the scheme should be regulated by the payment of distribution commission that is not greater than, if any, that is available after the AFC scheme switch.
AMFI, in collaboration with Sebi, will spell out the specific instructions on this matter.