The Securities and Exchange Board of India (SEBI) has announced new regulations to ensure timely deployment of funds raised through New Fund Offers (NFOs), marking a significant shift in how NFOs are managed in India and seeking greater transparency and investor confidence in the mutual fund industry. According to SEBI’s new guidelines, Asset Management Companies (AMCs) will now be required to deploy the funds within 30 business days from the date of unit allotment.

30-day deployment timeline

“The AMC shall deploy the funds garnered in an NFO within 30 business days from the date of allotment of units,” the SEBI’s latest circular said.

At present, AMCs face no firm deadlines for deploying NFO funds, leading to concerns about the efficient use of investor money. The new regulations, set to come into effect from April 1, 2025, will mandate that AMCs adhere strictly to the 30-day deadline.

Extension period

In the event of a delay, the Investment Committee of the AMC may grant a one-time extension of up to 30 business days. However, if the funds are not deployed within the stipulated 60 business days, investors will be offered an exit option without incurring any exit load.

“The AMC shall deploy the funds garnered in an NFO within 30 business days from the date of allotment of units. In an exceptional case, if the AMC is not able to deploy the funds in 30 business days, reasons in writing, including details of efforts taken to deploy the funds, shall be placed before the Investment Committee of the AMC,” the circular added.

Investor protection

The SEBI move aims to curb the issue of mis-selling and ensure that funds raised through NFOs are utilised realistically and promptly. The new guidelines are expected to reduce the practice of over-promising and under-delivering in NFOs, a concern that has been raised in recent years as some AMCs failed to deploy funds in a timely manner, leaving investors in limbo.

“In case the funds are not deployed as per the asset allocation mentioned in the SID as per the aforesaid mandated plus extended timelines, AMC shall:

i. not be permitted to receive fresh flows in the same scheme till the time the funds are deployed as per the asset allocation mentioned in the SID.

ii. not be permitted to levy exit load, if any, on the investors exiting such scheme(s) after 60 business days of not complying with the asset allocation of the scheme,” the SEBI circular added.

Penalty for non-compliance

Another significant aspect of the new rules is the introduction of a penalty mechanism. AMCs that fail to deploy funds within the stipulated timeline will be prohibited from accepting new flows in that particular scheme. This provision is designed to ensure that fund managers remain accountable and proactive in deploying investor funds effectively.

The new regulations are seen as a step toward improving the overall credibility of the mutual fund industry, addressing long-standing concerns around the management of investor money, and boosting investor trust in the NFO process.