Motilal Oswal Asset Management Company (MOAMC) has temporarily suspended fresh inflows into its Motilal Oswal Nifty Microcap 250 Index Fund following ongoing discussions with the Securities and Exchange Board of India (SEBI) regarding mutual fund categorisation rules. The halt became effective January 8 and addresses regulatory concerns about the fund's classification within existing mutual fund categories.

Regulatory Classification Issues

The suspension has been implemented because "micro-cap" is not recognised as a separate category under SEBI's existing mutual fund classification system. The scheme tracks the Nifty Microcap 250 Index, which comprises 250 stocks beyond the top 500 companies measured by market capitalisation. MOAMC stated it is conferring with SEBI to determine how the situation will be resolved going forward.

Impact on Investor Transactions

The asset management firm has ceased acceptance of all fresh subscriptions and transactions during this period. The suspension affects multiple investment modes:

• Lump-sum investments
• Systematic investment plans (SIPs)
• Systematic transfer plans (STPs)
• Other investment modes

Any transactions accepted after 3:00 p.m. on January 8 will not be processed and are set to be refunded in accordance with applicable procedures, according to the fund house.

Existing Investor Protection

MOAMC clarified that this action will not affect existing investors in the fund. The company stated that the fund will continue to be managed in accordance with its stated investment approach, maintaining the same management style that has been followed since inception. The fund house committed to making further announcements regarding this matter once discussions with SEBI are concluded.

Industry Expert Concerns

Neil Borate, editor-in-chief of thefynprint and former Personal Finance Editor of The Mint, raised several critical questions about the situation. He questioned why SEBI provided approval for the fund's launch in 2023 if the regulator didn't recognise the microcap category. Borate also expressed concerns about potential outcomes, including whether the fund might become an "orphan scheme" and be merged into Motilal Oswal's Smallcap Fund scheme.

The expert highlighted several risk factors for investors:

• Liquidity risks if the fund remains an orphan scheme
• Investment product changes if merged with another scheme
• Potential tax implications for investors choosing to exit

Borate emphasised that both SEBI and Motilal Oswal Mutual Fund need to clarify many aspects of this regulatory action to address investor concerns and market uncertainty.

Motilal Oswal Asset Management Company (MOAMC) has temporarily suspended fresh inflows into its Motilal Oswal Nifty Microcap 250 Index Fund following regulatory discussions with the Securities and Exchange Board of India (SEBI). The pause, effective January 8, addresses concerns regarding mutual fund categorisation norms as "micro-cap" lacks recognition as a separate category under SEBI's current classification framework.

Fund Operations Suspended

The asset management company has implemented a comprehensive halt on new investments across all channels. The suspension covers multiple investment modes and transaction types:

Any transactions received after the 3:00 PM cut-off time on January 8 will not be processed and will be refunded according to applicable procedures, the fund house confirmed.

Fund Structure and Investment Approach

The Motilal Oswal Nifty Microcap 250 Index Fund tracks the Nifty Microcap 250 Index, which comprises 250 stocks positioned beyond the top 500 companies by market capitalisation. This positioning places the fund in a regulatory grey area, as SEBI's current mutual fund classification framework does not recognise "micro-cap" as a distinct investment category.

MOAMC has assured that the fund will continue operating under its established investment approach, maintaining consistency with its management strategy since inception. The suspension affects only new inflows while preserving the fund's core operational framework.

Impact on Existing Investors

Current investors in the scheme remain unaffected by the operational pause. The fund house has clarified that existing holdings will continue to be managed according to the stated investment objectives and methodology. Portfolio management and fund operations for current investors will proceed without disruption during the regulatory review period.

Regulatory Resolution Timeline

MOAMC is actively engaged in discussions with SEBI to determine the appropriate path forward for the fund's classification and operations. The asset management company has committed to providing further communication once these regulatory discussions reach a conclusion. The timeline for resolution remains dependent on the outcome of ongoing talks with the market regulator regarding mutual fund categorisation norms and the fund's compliance framework.