The investment management landscape in India has evolved significantly, with introduction of various investment products. The Securities and Exchange Board of India ("SEBI") has adopted a segmented, risk-based regulatory approach for these products, varying based on factors like complexity, target investors, and minimum investment sizes. The regulatory framework becomes progressively more flexible from Mutual Funds ("MFs") to Portfolio Management Services ("PMS") to Alternative Investment Funds ("AIFs").
A gap has emerged between MFs and PMS in terms of portfolio flexibility, creating the need for a new investment product. To address this, SEBI has amended the SEBI (Mutual Funds) Regulations, 1996 ("MF Regulations"), vide circular dated December 16, 20241, to introduce the concept of a Specialized Investment Fund ("SIF"). SIF is a form of an investment vehicle, where capital is pooled from accredited investors to invest in specific, non-traditional assets or asset classes, such as private equity, real estate, and infrastructure. Unlike conventional MFs, SIFs offer a more targeted approach, focusing on sectors that may not be accessible through traditional investment channels. The comprehensive regulatory framework for SIF is provided in Annexure A of the circular dated February 27, 20252 ("SIF Circular"). The new regulatory framework laid out under the SIF Circular will come into effect from April 1, 2025.
Eligibility Criteria for SIF
Under Regulation 49W(1) of the MF Regulations, a MF registered under Regulation 9 can be granted approval to establish a SIF if it meets specific eligibility criteria. There are two routes for eligibility:
- Route 1 – Sound Track Record:
- The MF must have been operational for at least 3 (three) years and have average assets under management ("AUM") of not less than INR 10,000 crores (Indian Rupees Ten Thousand Crores) in the preceding 3 (three) years.
- No regulatory action should have been taken against the sponsor/asset management company ("AMC") under Sections 11, 11B, or 24 of the Securities and Exchange Board of India Act, 1992 ("SEBI Act") in the past 3 (three) years.
- Route 2 – Alternate Route:
- The AMC must appoint a Chief Investment Officer with at least 10 (ten) years of fund management experience who has managed an average AUM of not less than INR 5,000 crores (Indian Ruppees Five Thousand Crores).
- The AMC must also appoint an additional fund manager with at least 3 (three) years of experience of fund management who has managed an average AUM of INR 500 crores (Indian Rupees Five Thousand Crores).
- Similar to Route 1, no regulatory action should have been taken against the sponsor/AMC in the past 3 (three) years under Sections 11, 11B, or 24 of the SEBI Act.
Additionally, the AMC may share resources across MFs and SIF. A registered MF must file an application for SEBI's prior approval to establish an SIF in the prescribed manner.
Branding and Advertisement Requirements
The SIF Circular states that in order to differentiate the SIF and maintain brand integrity of the MF,AMCs shall have a distinct brand name and logo for the SIF, which is separate from the MF. The SIF Circular further lays down detailed guidelines along with illustrations for branding and advertisement to be adhered to by the AMC.
Investment Strategies
As per Regulation 49U(c) of the MF Regulations, 'Investment Strategy' means a scheme of mutual fund launched under the Specialized Investment Fund.
The following investment strategies have been permitted to be launched under the SIF Circular:
- Equity Oriented Investment Strategies;
- Debt Oriented Investment Strategies; and
- Hybrid Investment Strategies
Minimum Investment Threshold
The AMC must ensure that an investor's total investment across all investment strategies offered by the SIF, at the permanent account number level, meets a minimum investment threshold of INR 10,00,000 (Indian Rupees Ten Lakhs). This threshold applies only to SIF investments and excludes regular MF investments. The AMC may offer systematic investment options such as systemic investment plan, systemic withdrawal plan, and systemic transfer plan, ensuring compliance with the minimum investment threshold.
Breach of Minimum Investment Threshold
The AMC must monitor compliance with the minimum investment threshold on a daily basis and ensure that the investor's total investment does not fall below the threshold due to redemption. Passive breaches, such as a decline in net asset value ("NAV"), will not be considered a violation, but if the investment falls below the threshold due to such a breach, the investor can only redeem the entire remaining investment amount from the SIF.
Restriction on Investments
SIFs are subject to investment restrictions in addition to Regulation 49(AA) of the MF Regulations. An investment strategy under SIF cannot invest more than 20% (twenty percent) of its NAV in securities issued by a single issuer rated AAA. The limit is 16% (sixteen percent) for AA-rated securities and 12% (twelve percent) for A-rated and below. These limits may be extended by up to 5% (five percent) of the NAV with necessary approvals. No investment strategy can invest more than 25% (twenty-five percent) of its NAV in securities of a particular sector.
Investment in Derivatives
SIFs are permitted to invest in exchange-traded derivative instruments, not just for hedging and portfolio rebalancing, but also to take unhedged short positions up to 25% (twenty-five percent) of net assets. The cumulative gross exposure across equity, debt, derivatives, repo transactions, and credit default swaps cannot exceed 100% of the investment strategy's net assets.
Subscription and Redemption of Units of Investment Strategies
SIFs offer flexibility in structuring investment strategies, allowing them to be open-ended, close-ended, or interval-based, with varying subscription and redemption frequencies. These frequencies can be daily, weekly, fortnightly, monthly, quarterly, annually, or at other suitable intervals, and may differ for subscriptions and redemptions. This flexibility allows fund managers to effectively manage liquidity without undue constraints on investors.
To manage liquidity risk, AMCs can implement notice periods for redemptions, not exceeding 15 (fifteen) working days. The redemption value is based on the NAV at the end of the notice period. This structure allows for efficient liquidity management and provides investors with clear redemption guidelines.
Benchmarking of Investment Strategies
SIF investment strategies follow a single-tier benchmark structure, with the option for AMCs to add a second-tier benchmark at their discretion. Benchmark selection should align with the investment objective and portfolio, using broad market indices like the BSE Sensex or NSE Nifty for equity-oriented strategies. Debt-oriented strategies should be compared against a representative broad market index, while hybrid strategies use suitable broad market benchmarks when available. This structured approach to benchmarking provides clear performance comparisons and aids in evaluating investment strategies within SIFs.
Disclosure in Offer Documents
To ensure transparency and informed decision-making, SIF offer documents must disclose key information about the investment strategies. This includes details such as the redemption and subscription frequency, any applicable notice periods, the frequency of portfolio disclosure, and scenario analysis for derivative positions. Additionally, disclosures should cover investment specifics in derivatives, including the maximum limit for non-hedging and portfolio rebalancing purposes. The documents should also outline liquidity risk management tools and their applicability, along with any other relevant information that empowers investors to make informed decisions.
Disclosure Requirements
SIFs have specific disclosure requirements to ensure transparency. They must disclose their portfolio, including derivative instruments, every alternate month on the AMC and AMFI websites. The Investment Strategy Information Document must include a scenario analysis showing potential losses due to market movements. All offer documents should be publicly available, including on the SIF and AMFI websites. Finally, all advertisements and promotional materials must include a standard disclaimer about the risks involved in SIF investments. This comprehensive disclosure regime aims to keep investors informed and promote responsible decision-making in SIFs.
Conclusion
The introduction of SIFs bridges a gap between traditional MFs and PMS, offering a new avenue for sophisticated investors. With a higher investment threshold and flexible investment strategies, SIFs cater to those seeking greater control and diversity. The comprehensive regulatory framework ensures transparency and risk management, safeguarding investors' interests. As the investment landscape continues to evolve, SIFs are poised to play a significant role in shaping the future of investment opportunities in India.
Footnotes
Originally published 24 March, 2025
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