SEBI Sets 30-Day Deadline for Deployment of NFO Proceeds

The Securities and Exchange Board of India (SEBI) established a new requirement that demands Asset Management Companies (AMCs) to invest New Fund Offer (NFO) gathered funds within a 30-day business period from unit allotment dates. SEBI announced the new rule to be effective from April 1, 2025. With this move, SEBI seeks to motivate AMCs to acquire funds they can allocate in a timely manner while working to prevent NFO mis-selling activities.

Timelines and Potential Extensions

An important requirement for AMCs is that realistic fund distribution timelines be included in their Scheme Information Document (SID). AMCs must submit such unresolved cases to their Investment Committee when they fail to utilise the investment funds within their first thirty days of business operations. The Investment Committee can provide one solitary extension of thirty business days when they thoroughly analyse and document the causes behind the time lag. Extensions cannot be given to funds when assets within the scheme are easily available for use or liquidation. The Investment Committee is responsible for recommending future fund deployments to occur within initial 30-day periods while also overseeing such deployments.

Trustees must closely monitor scheme compliance through specific checks to prevent non-compliance. Failure to comply will result in consequences. The trustees of the mutual fund must actively oversee fund deployments from NFOs while adopting measures that lead to prompt allocation of the collected funds. The mutual fund company loses its ability to receive new money for that scheme after the expiration of specified deployment times unless it utilises all collected funds according to the stated allocation. After 60 business days of ASM compliance, the AMC loses its ability to impose an exit load for investors who decide to withdraw their funds from mutual fund schemes. 

Flexibility in NFO Period

A fund manager can adjust the duration of new fund offers to effectively handle the financial flows. Mutual funds linked to Equity Linked Savings Scheme (ELSS) schemes do not allow flexibility regarding the NFO period. Fund managers may alter the NFO period by assessing the market conditions and asset availability and their capacity to distribute accumulated funds.

Measures to Discourage Mis-selling

SEBI has implemented measures to reduce mutual fund mis-selling through its distributors. Funds distributed through switch transactions from existing schemes managed by the same AMC to NFO regular plan investment must receive a commission that exceeds the payments offered under the original schemes and their NFO regular plan.

Investor Considerations

All potential investors should carefully review the Scheme Information Document prior to making NFO and current scheme investments. Investors should select mutual fund schemes that match their risk tolerance, along with financial objectives and time requirements, and verify the correct asset distribution. With the new rule, SEBI intends to protect investors through immediate fund distribution based on the scheme directives.

Background and Rationale

SEBI discovered substantial time lapses involved in using funds generated by NFOs. Several factors affecting the duration of fund deployment include large fund amounts, costly valuations, macroeconomic developments, geopolitical events, market price fluctuations, and gaps in suitable securities. SEBI understands that large corpus deployment should be flexible, but continued retention of NFO proceeds without any deployment is unacceptable.

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