Sebi proposes timeline of 30 days for mutual funds to deploy funds of NFOs, with 30 days extension if needed

The regulator, while acknowledging that there should be flexibility given to the fund managers to deploy the funds according to his/her view, said that the AMC should not retain the proceeds from the NFO for an indefinite period of time.

The market regulator has proposed that mutual funds deploy funds collected through new fund offers (NFOs) within 30 days from the date of allotment of units.

In exceptional cases, if the asset management company (AMC) is not able to deploy within this time frame, then it will need give the reasons in writing for the delay to the Investment Committee. The Investment Committee can then give an extension of another 30 days along with recommendations on how this new deadline can be met and with a mechanism to track the deployment.

These were suggestions issued through a consultation paper released by the Securities and Exchange Board of India (Sebi) on October 30. Public comments have to be sent in by November 20.

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The consultation paper said, "During examination of the periodic submissions made by AMCs, it was observed that in a certain instance there was a considerable delay in deployment of the funds collected through NFO. The delay was attributed to the size of the funds collected as well as the volatility in the market."

Currently, there is no regulatory provision specifying the timeline for deployment of funds after an NFO. There is a timeline set for allocation of units--five days from the closure of the units--but none set for the deployment of funds after the allocation.

The regulator, while acknowledging that there should be flexibility given to the fund managers to deploy the funds according to his/her view, said that the AMC should not retain the proceeds from the NFO for an indefinite period of time. Therefore, the consultation period said, a timeline needs to be set for the deployment of funds.

After discussions with the industry body and the advisory committee, and the advisory committee suggested that a total of 90 days be given (60 days for deployment and 30 days extension if needed) for the deployment of funds.

But data analysed by Sebi, which covered 647 schemes, showed that a large majority of the AMCs deployed their funds within 30 days.

The data showed that, for 603 NFOs, AMCs took less than 30 days from the date of allotment of units to achieve the asset allocation as specified in the scheme information document (SID) of the scheme. Cumulatively 633 NFOs (including the 603) took less than 60 days for the same.

The paper noted 98 percent of the NFOS launched in the last three financial years were able to achieve the asset allocation as specified in the SID in 60 days or less.

Therefore, the regulator did not allow for 90 days as suggested by the advisory committee but has proposed a deadline of 60 days (including the 30 day extension).

As the paper said, "Considering that most of the schemes achieved asset allocation in 60 days or less, having a time period of 90 business days for the deployment of the funds garnered in the NFO may not be in the interest of the investor."