Motilal Oswal Nifty Microcap 250 Fund: Sebi backtracks on ‘fast tracked’ fund approval on liquidity, benchmarking concerns

Cash Segment margin likely to reduce, SEBI panel clears the margin rationalisation proposal 

• SEBI stops new investments in Motilal Oswal Microcap Fund due to classification issues.
• No formal microcap category exists under SEBI or AMFI norms
• Investors can redeem; fund stays operational amid regulator discussions

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The market regulator’s push to halt fresh inflows into the Motilal Oswal Nifty Microcap 250 Index Fund stems from concerns around product classification, benchmarking and liquidity, according to a regulatory source familiar with the matter.

A key issue is the absence of a formally recognised microcap category under Securities and Exchange Board of India or AMFI norms. “There is no such category as micro-cap defined either by SEBI or AMFI, so such schemes are not tenable,” the regulatory source told Moneycontrol.

Also read: Motilal Oswal Nifty Microcap 250 Fund: Fresh inflows stopped in consultation with Sebi, not due to performance concerns, says Pratik Oswal

The fund had initially received approval under SEBI’s fast-track route, which allows quicker clearances for products that replicate existing indices. However, the source said that regulatory scrutiny increased as concerns emerged about froth in the microcap space.

Launched in July 2023, the fund raised Rs 120 crore and the AUM currently stands at Rs 2625 crore.

“The scheme was earlier approved as part of the fast-track approval process as it was simply a replication of an existing index. But thereafter, concerns around froth in the microcap segment were raised and no such schemes were approved,” the source said.

Beyond market conditions, the regulator has also flagged other issues. These include the absence of a recognised benchmark aligned with SEBI’s classification framework, potential “true-to-label” risks, and liquidity constraints inherent in the microcap universe. “In the interest of investors, new flows have been restricted,” the source added.

Currently, there is a divergence between SEBI’s market-cap definitions and index construction methodologies of exchanges. Anand Rathi Wealth’s Shweta Rajani said SEBI classifies stocks purely by market capitalisation, with large-cap, mid-cap and small-cap buckets, but has never formally defined microcaps.

Index providers, however, apply additional filters such as trading volumes and impact costs to carve out microcap indices. This can result in mismatches where stocks categorised one way under SEBI norms appear differently in index universes.

Motilal Oswal’s scheme is currently the only microcap index fund in the mutual fund industry. While there is restriction on inflows, the fund remains operational while discussions between the asset manager and the regulator continue. Existing investors continue to have normal redemption access.

Moneycontrol has reached out to SEBI for a comment and will update the story.