Sebi directs mutual funds to deploy NFO fund within 30 days of allotment

Markets regulator Sebi on Thursday made it mandatory for asset management companies to deploy money collected from investors through new fund offers (NFOs) within 30 days from the date of allotment of units. At present, there is no time limit for deployment of funds.

The measure, to be implemented from April 1, 2025, is aimed at encouraging AMCs to collect only as much funds in NFOs as can be deployed in a reasonable period of time and to discourage any mis-selling of NFOs of the mutual fund schemes In a circular, Sebi asked AMCs to specify achievable timelines in the Scheme Information Document (SID) of a mutual fund scheme regarding the deployment of the funds as per the specified asset allocation of the scheme and garner funds during the NFO accordingly.

"The AMC shall deploy the funds garnered in an NFO within 30 business days from the date of allotment of units," it added.

In an exceptional case, if the AMC is not able to deploy the funds in 30 business days, it must give reasons in writing, including details of efforts taken to deploy the fund to the investment committee of the AMC.

The committee can extend the timeline by 30 business days, while also making recommendations on how to ensure deployment within 30 business days going forward and monitoring the same.

It would examine the root cause for delay in deployment before granting approval for part or full extension.

"The Investment Committee shall not ordinarily give part or full extension where the assets for any scheme are liquid and readily available", Sebi said.

Sebi said that Trustees will be responsible for monitoring the deployment of funds collected in NFO and taking steps to ensure that the funds are deployed within a reasonable timeframe.

In case the funds are not deployed as per the asset allocation mentioned in the SID along with extended timelines, AMCs will not be allowed to receive fresh flows in the same scheme till the time the funds are deployed as per the asset allocation mentioned in the SID.

Additionally, AMCs will not be permitted to levy exit load on the investors exiting such scheme(s) after 60 business days of not complying with the asset allocation of the scheme and will report deviation, if any, to Trustees at each of the stages.

The move came after Sebi 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.

To effectively manage the fund flows in NFO, the fund manager can extend or shorten the NFO period (except for Equity Linked Savings Scheme or ELSS), based on his view of the market dynamics, availability of assets and his ability to deploy funds collected in NFO.

To discourage mis-selling of mutual funds schemes by Mutual Fund Distributors in case of switch transaction to NFO of a regular plan of mutual fund scheme from an existing scheme managed by the same AMC, Sebi said that AMC will have to ensure that the distribution commission paid is lower of the commissions offered under the two schemes of switch transaction.

The detailed guidelines in this regard will be specified by the industry body AMFI in consultation with Sebi.