Sebi proposes sweeping changes for fund managers, AMC overhaul amid conflict of interest concerns

Mint

07-07-2025

In a move that could significantly reshape India's mutual fund landscape, the Securities and Exchange Board of India (Sebi) has proposed a revamp of rules governing asset management companies (AMCs). The key proposal seeks to amend Regulation 24(b) of the Sebi (Mutual Funds) Regulations, 1996, which currently restricts AMCs from managing only broad-based pooled assets.
Broad-based pooled assets refer to funds with a large investor base—typically mutual funds involving lakhs of retail investors. AMCs seeking to serve non-broad based clients (such as funds with fewer than 20 investors or where one client contributes over 25% of the corpus) currently need a separate Portfolio Management Service (PMS) licence.
Specifically, Regulation 24(b) restricts AMCs from undertaking any business activity other than in the nature of management and advisory services provided to pooled assets, including offshore funds, insurance funds, pension funds, provident funds, or such categories of foreign portfolio investor, as may be specified by Sebi.
A PMS offers customized investment management for high-net-worth individuals and institutional clients. This existing regulatory structure, implemented in 2011 based on committee recommendations, was designed to prevent conflicts of interest, situations where an individual or organization has competing interests that could compromise their impartiality due to differential fee structures.
The Indian mutual fund industry, through its representative body, the Association of Mutual Funds in India (AMFI), has consistently advocated for a review of Regulation 24(b).
Seeking flexibility
Industry stakeholders argue that the broad-basing requirement has proven to be a barrier, limiting their business opportunities and not providing a 'level playing field"—meaning they face competitive disadvantages compared to other intermediaries engaged in providing management and advisory services to non-broad based funds. AMCs contend that they possess the necessary domain expertise to manage a broader spectrum of pooled assets and are seeking greater operational flexibility as an 'ease of doing business initiative".
Allowing AMCs to provide management and advisory services to both broad-based mutual funds and these specialized non-broad based funds from the same entity may raise several critical potential conflicts of interest, which Sebi addressed in its consultation paper of Monday.
Sebi raised concerns that AMCs might be incentivized to charge higher fees from their pooled non-broad based clients. This could lead to reallocation of skilled personnel and resources away from retail mutual funds, potentially resulting in suboptimal outcomes or unfair cost allocation to mutual fund investors.
According to legal experts like Akshaya Bhansali, partner at Mindspright Legal, the differentiation in fee structures between investment management and advisory activities, particularly for pooled non-broad based funds, may skew AMCs' incentives toward higher revenue opportunities, potentially compromising investor interests.
Another significant risk involves fund managers using confidential information from mutual fund trades to benefit non-broad based clients by front running or taking opposite positions, potentially manipulating market prices.
Sebi also feared that AMCs could potentially exploit inside information obtained through mutual fund operations—to unfairly benefit their pooled non-broad based clients.
Experts added that the risks of contrary trade positions and front-running are evident and highly relevant in today's market, with instances rising markedly over the past five years. 'Allowing AMCs to manage pooled non-broad-based funds could exacerbate these issues by enabling misuse of privileged information to favour larger clients," Mindspright Legal's Bhansali said.
Transfers between funds
Another concern was also regarding the potential transfer of low-quality debt assets or assets likely to default from the portfolio of a pooled non-broad based investor to a broad-based fund, undermining fair treatment and fiduciary duty.
To counteract these risks, Sebi outlined a series of checks and balances such as upper and lower limits on fees and curbs on performance-linked fees;separation of fund managers and back-office teams, unless portfolios are 70%+ identical; application of a six-month contra trade rule and strict internal trade allocation policies; prohibiting transfer of securities between mutual funds and non-broad based funds; and, upholding insider trading rules and ensuring that sensitive data from mutual funds isn't misused.
Lawyers advising AMCs noted that introducing a 'cap and floor' on fees charged for managing such funds helped establish clear boundaries, preventing excessive charges or undercutting. 'Aligning fee structures more closely with those of mutual fund schemes can further promote fairness, reduce conflicts of interest, and encourage more efficient resource allocation across fund activities without distorting cost structures," Bhansali said.
AMCs will also be required to ensure that activities for pooled non-broad based funds do not stem from information obtained through mutual fund operations. Bhansali said this measure is prudent to deter insider trading, to promote fair practices, and protect the mutual fund industry from front-running, insider trading, and related abuses.
Ketan Mukhija, partner at Burgeon Law, said the proposed relaxations could enable AMCs to diversify revenue streams and expand into allied financial services. 'It may also raise concerns about conflict of interest, resource diversion, and investor protection—necessitating strong internal controls, clear segregation of activities, and strict regulatory oversight to ensure mutual fund investors are not adversely impacted," he said.
Sebi has called for public feedback till 28 July.