SEBI mandates uniform rules for passive breaches in mutual funds

The Securities and Exchange Board of India (SEBI) has issued a circular to clarify the application of rebalancing rules for passive breaches in actively managed mutual fund schemes. These breaches occur when a fund’s investments exceed allowed limits due to factors beyond the control of fund managers, such as price fluctuations or large redemptions. SEBI’s directive requires mutual funds to adhere to the same timelines for addressing these breaches as they do for other types of breaches.

SEBI emphasised that the provisions outlined in paragraph 2.9 of its Master Circular will now apply uniformly to all passive breaches. This clarification follows recommendations from the Mutual Funds Advisory Committee (MFAC), underscoring the need for consistency in breach management across actively managed schemes. SEBI stated, “In view of…the recommendation of the Mutual Funds Advisory Committee (MFAC), it is clarified that the provisions shall be applicable for all types of passive breaches for the actively managed mutual fund schemes.”

A passive breach, as defined by SEBI, involves unintended deviations from allocated asset limits due to external influences, and not because of fund manager actions. These breaches may arise from corporate actions or significant price movements in underlying securities. SEBI’s directive mandates a rebalancing period of 30 business days to correct such deviations, excluding Index Funds and Exchange-Traded Funds (ETFs).

The circular specifies that while active breaches are considered violations of SEBI’s mutual fund regulations, passive breaches stem from market dynamics and external conditions. Despite being unintentional, these breaches can impact the risk profile of mutual fund schemes, necessitating timely corrections. SEBI noted, “The provisions prescribed under paragraph 2.9 of the Master Circular shall be applicable for all types of passive breaches for the actively managed mutual fund schemes.”

SEBI’s latest clarification aims to bring uniformity to how breaches are handled within the mutual fund industry, ensuring that both active and passive breaches receive equal attention. This move is designed to safeguard investor interests by maintaining the risk profile of mutual fund portfolios within acceptable limits. The recommendations made by the MFAC have played a crucial role in shaping this regulatory approach.

Issued under the authority of Section 11(1) of the SEBI Act, 1992, and Regulation 77 of the SEBI (Mutual Funds) Regulations, 1996, the circular underscores the importance of regulatory compliance in the management of mutual funds. The SEBI’s proactive stance reflects its commitment to maintaining transparency and protecting investors in the evolving financial landscape.

This development highlights SEBI’s ongoing efforts to refine the regulatory framework governing mutual funds, addressing both intentional and unintentional breaches to promote a stable and trustworthy investment environment. By enforcing a uniform policy for passive breaches, SEBI seeks to ensure that asset management companies remain vigilant in managing their portfolios effectively.