SEBI clarifies rebalancing timeline norms for MFs after passive breaches

If the rebalancing is not completed within this period, the AMC’s Investment Committee may extend the timeline by an additional 30 business days, provided it receives a written explanation and documentation of efforts taken to restore compliance.

The Securities and Exchange Board of India (SEBI) has issued a clarification through a circular dated June 26, reiterating the timelines mutual fund schemes must adhere to when rebalancing portfolios following passive breaches of mandated asset allocation.

The clarification comes under Paragraph 2.9 of SEBI’s Master Circular for Mutual Funds in order "to ensure uniformity and regulatory consistency across the industry".

Passive breaches refer to instances where the asset allocation of a mutual fund scheme deviates from what is stated in its Scheme Information Document (SID), not due to any omission or commission by the asset management company (AMC). Such deviations, the circular notes may arise due to reasons like corporate actions, market-driven price fluctuations, maturity of securities, or large redemptions. While active breaches are treated as regulatory violations, passive breaches are acknowledged as unintentional and often unavoidable.

As per the circular, all actively managed mutual fund schemes (excluding index funds and exchange-traded funds) must bring their portfolios back in line within 30 business days of a passive breach. If the rebalancing is not completed within this period, the AMC’s Investment Committee may extend the timeline by an additional 30 business days, provided it receives a written explanation and documentation of efforts taken to restore compliance. Additionally, it notes that if the scheme fails to rebalance even within the extended 60-day period, the AMC will not be allowed to launch any new mutual fund schemes and must also refrain from levying exit loads on investors exiting the affected scheme.

In addition to enforcing a strict timeline, SEBI has mandated that if the breached portfolio’s assets exceed 10 percent of the main portfolio’s AUM, investors must be immediately informed via SMS and email, both at the time of deviation and once rebalancing is completed. Further, any breach must be disclosed as part of periodic portfolio disclosures if rebalancing extends beyond the maximum permitted timeline.

This clarification has been issued following recommendations from SEBI’s Mutual Funds Advisory Committee.