SEBI clarifies rebalancing timeline norms for MFs after passive breaches

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.