The Securities and Exchange Board of India (SEBI) has introduced a new regulation, effective April 1, 2025, requiring Asset Management Companies (AMCs) to deploy funds collected from New Fund Offers (NFOs) within 30 days from the allotment date. Currently, there is no mandatory timeline for fund deployment.

Objective of the New Rule

• To ensure timely and efficient use of investor funds collected via NFOs.
• To discourage mis-selling and prevent AMCs from collecting more funds than they can deploy quickly.
• To increase accountability and protect investor interests.

New Guidelines for AMCs

• AMCs must deploy funds within 30 business days post-allotment of units.
• This applies to all NFOs launched on or after April 1, 2025.
• The Scheme Information Document (SID) must specify:
  • A realistic timeline for deploying funds as per the scheme’s asset allocation strategy.
  • The fund collection plan aligned with deployment capability.

Provision for Extension in Exceptional Cases

• If deployment is not possible within 30 days, the AMC must submit written reasons to its Investment Committee.
• The written note should also include:
  • Details of efforts made to deploy the funds.
  • Specific challenges or market conditions encountered.
• The Investment Committee may:
  • Approve an extension of up to 30 additional business days.
  • Recommend corrective actions to ensure timely deployment in the future.
  • Conduct a root cause analysis for the delay.

Note: Extensions will not be granted if the underlying assets are liquid and easily accessible.

Role of Trustees

• Trustees are responsible for overseeing and ensuring compliance with the deployment timeline.
• They must:
  • Monitor fund usage post-NFO.
  • Take necessary action in case of delays or deviations.
  • Ensure that AMCs align with SEBI’s directive throughout the fund lifecycle.

Penalties for Non-Compliance

If AMCs fail to deploy funds as per the scheme’s asset allocation within the allowed timeline (including any approved extension), the following restrictions apply:

• No new investments (fresh flows) will be allowed in the scheme until compliance is achieved.
• Exit load cannot be levied on investors who exit the scheme after 60 business days of non-compliance.
• AMCs must report all deviations to the Trustees at each stage of the process.

NFO Period Flexibility for Fund Managers

• Fund managers are allowed to extend or shorten the NFO period, depending on:
  • Market conditions
  • Asset availability
  • Their ability to deploy funds efficiently

This flexibility does not apply to ELSS (Equity Linked Savings Schemes).

Restrictions on Switch Transactions and Distributor Commissions

• To prevent mis-selling by mutual fund distributors, SEBI mandates:
  • If investors switch from an existing scheme to a regular plan of a new NFO from the same AMC, the distribution commission for the NFO must be lower than that of the original scheme.
  • This ensures that switches are driven by investment merit, not distributor incentives.

Conclusion

SEBI’s new mandate ensures that AMCs act responsibly while raising funds through NFOs. By imposing clear timelines, strict compliance monitoring, and penalties for delays, this move enhances transparency, investor protection, and operational discipline in the mutual fund industry.