SEBI Introduced New Rules for Passive Mutual Fund Schemes to Reduce Sponsor Bias

Current Context: The Securities and Exchange Board of India (SEBI) has recently implemented stricter regulations for passively managed mutual funds.

These rules aim to mitigate concentration risk and promote greater diversification within these funds.
Here are the key changes:

Limit on Sponsor Investment:

Passive mutual funds (except for equity-oriented Exchange Traded Funds (ETFs) and index funds) are now restricted from investing more than 25% of their net assets in listed securities of companies belonging to the sponsor group.
Equity-oriented ETFs and index funds have slightly more flexibility and can invest in sponsor group companies based on the weightage of those companies within the underlying index. However, this investment is capped at 35% of the fund’s net asset value.

Transparency in Index Tracking:

To ensure transparency, SEBI has defined “widely tracked and non-bespoke indices.” These indices have a collective Asset Under Management (AUM) of Rs 20,000 crore and above, are tracked by passive funds, and serve as primary benchmarks for actively managed funds.
The Association of Mutual Funds in India (AMFI) will update and publish a list of approved indices biannually, including prominent indices like Nifty 50 and BSE Sensex.

Rebalancing for Non-Compliant Funds:

Passive schemes not aligned with the approved indices must rebalance their portfolios within 30 business days from the date of SEBI’s circular.
If a fund cannot rebalance within the initial 30 days, the Asset Management Company (AMC) must provide written justification to their Investment Committee. The committee can extend the rebalancing timeline by up to an additional 60 business days.

Question:

1 What is the new limit on sponsor investment for passive mutual funds, excluding equity-oriented ETFs and index funds, as per SEBI's new regulations?