SEBI to soon unveil F&O exposure limits, strategies for New Asset Class

As per the new regulations, no strategy under the SIF can invest more than 10 percent of its NAV in the equity shares of a single company. Earlier the consultation paper had said a SIF can invest 15 percent of its NAV in equity shares of a single company.

The Securities and Exchange Board of India (SEBI) will soon come up with further circulars on specific investment strategies that the 'New Asset Class' or 'Specialized Investment Fund' (SIF) can offer to its clients, said people in the know.

These strategies, among others, would include the ones mentioned in the consultation paper like inverse ETF and long-short ones, the people added.

“We need to also finalise on what exposure to derivatives it will have. Once the strategies are out, the mutual fund industry can decide what strategies to adopt,” said a person with direct knowledge of the matter.

Also read: Explainer | Specialised investment fund: How this new asset class will work and help investors

This assumes significance as the PMS and AIF industry players are waiting further clarity on the granular details related to the structure of the product in order to decide if they really want to opt for a mutual license to offer the product.

Last year when SEBI mooted the idea of SIF via a consultation paper there was much chatter amongst the PMS and AIF players. It was, however, because they felt left out as the regulator only wanted to allow mutual funds to offer the product. However, the final regulations, which came out in December, made it clear that PMSes and AIFs can offer SIF but only after obtaining a mutual fund licence.

Incidentally, PMS and AIF players are no more gung-ho about offering the product as they believe that the rules are unclear in terms of the investment strategies and approach.

As a result, aside from the tax advantages that mutual funds provide, which will also apply to the SIF, there appears to be no significant benefits for PMS and AIF managers to work towards obtaining a mutual fund licence, AIF and PMs players told Moneycontrol.

The uncertainty rises from the initial consultation paper, which suggested that strategies such as long-short, inverse ETFs, and derivatives could be employed by mutual funds that will eventually be offered by SIFs. However, the circular lacks clarity on whether these strategies can be applied to the new asset class.

Sushant Bhansali, chief executive officer of Ambit Asset Management said that the final regulations for SIF have reduced flexibility in equity portfolio concentration by lowering the maximum investment in a single company to 10 percent of the portfolio. This change, he explained, while better from a risk management perspective for investors is likely to impact alpha generation.

As per the new regulations, no strategy under the SIF can invest more than 10 percent of its NAV in the equity shares of a single company. Earlier the consultation paper had said a SIF can invest 15 percent of its NAV in equity shares of a single company.

The SEBI board, in December last year, approved the concept of SIF with a minimum ticket size of Rs 10 lakh. SIFs were introduced as a product between a mutual fund and a PMS and can offer higher risk and flexible products as compared to mutual funds.

The body for PMS, Association of Portfolio Managers (APMI) has sent a formal recommendation to the market regulator after the final regulations were out for SIF, sources said.

“SIFs by nature require a high trust structure and PMSes inherently do not have the level of trust like a mutual fund. So instead of completely making the segment inaccessible to the PMS players, the regulator can increase the threshold in terms of regulations for PMS players,” an APMI official said.

Sources further said that after the consultation paper was out, the body for AIFs, Indian Venture and Alternate Capital Association (IVCA) had sent suggestions to the capital market watchdog saying that a separate licence should be given to Category III AIF managers to operate the SIF. However, the regulator turned down this demand saying it was more comfortable operating the SIF under a mutual fund umbrella.

The tax advantage

The SIF would be taxed lower as compared to Category III AIFs as the products would be launched by mutual funds, which enjoy the benefits of a pass-through status – the income is taxed in the hands of the investor and the fund does not have to pay any tax.

In the case of an equity mutual fund, the investor will have to pay a tax on the capital gains, which is 12.5 percent for long-term and 20 percent for short-term. In the case of a Category 3 AIF, however, the tax is paid at the fund level, which could be as high as nearly 40 percent.

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