SEBI is implementing stricter oversight on New Fund Offers (NFOs), particularly targeting thematic and sectoral mutual funds that demonstrate significant portfolio overlap with existing schemes. The regulator is enforcing these measures even before finalizing official regulations, creating immediate impact on asset management companies' NFO strategies.

Portfolio Overlap Framework and Current Implementation

SEBI released a consultation paper on July 18 proposing that mutual funds should not allow more than 50% of stocks in sectoral or thematic schemes to overlap with stocks in other equity schemes from the same AMC. Large-cap schemes remain exempt from this restriction.

Despite the rules not being officially finalized, SEBI is already enforcing these guidelines during the NFO approval process. When AMCs submit new thematic NFO applications, SEBI requests model portfolios and conducts detailed overlap analysis with existing equity funds. Cases showing excessive overlap require AMCs to provide justification for the new fund launch.

Market Data Reveals Concentration in Thematic Launches

AMFI data demonstrates the scale of thematic fund proliferation in the mutual fund industry:

The data reveals that thematic and sectoral fund launches significantly outnumber new offerings across all other equity categories combined. Analysis shows three out of five thematic schemes exhibit more than 50% overlap with another scheme within their respective fund houses.

Value and Contra Fund Overlap Monitoring

SEBI proposes allowing AMCs to manage both value and contra funds under specific conditions:

Impact on Asset Management Companies

The enhanced oversight creates several operational challenges for AMCs:

• Extended Approval Timelines: Portfolio overlap analysis adds complexity to the NFO approval process
• Strategic Restructuring: AMCs must demonstrate clear differentiation between proposed and existing schemes
• Reduced Launch Frequency: Stricter scrutiny may result in fewer successful NFO approvals
• AUM Growth Constraints: Traditional growth strategies through similar thematic funds face regulatory barriers

Regulatory Rationale and Market Structure

SEBI's concerns stem from the current regulatory framework that restricts mutual fund houses to one scheme per category, while exempting sectoral and thematic funds from this limitation. This exemption has led to concentrated activity in thematic fund launches, often resulting in portfolio duplication under different scheme names.

The regulator aims to address investor confusion caused by multiple funds with similar portfolios but different marketing themes. The overlap restrictions seek to ensure genuine diversification and meaningful choice for investors while maintaining market integrity.

Implementation Timeline and Monitoring

While the consultation paper remains under review, SEBI's immediate enforcement demonstrates regulatory commitment to addressing portfolio overlap issues. The proposed monitoring framework includes regular portfolio comparisons and structured correction mechanisms to ensure ongoing compliance with overlap limitations.

The Securities and Exchange Board of India (SEBI) has introduced a comprehensive regulatory framework for 'Significant Indices' as part of its ongoing efforts to strengthen governance standards among Index Providers in the securities market. The proposal, outlined in a consultation paper released on Monday, establishes clear criteria and operational guidelines for enhanced oversight of major financial benchmarks.

Definition and Scope of Significant Indices

SEBI has defined "Significant Indices" as those administered by an Index Provider and benchmarked by domestic mutual fund schemes with cumulative Assets Under Management (AUM) exceeding ₹20,000 crore. This threshold-based approach ensures that the regulatory framework captures indices with substantial market influence and investor exposure.

AUM Calculation Methodology

The regulatory framework establishes a detailed methodology for calculating the AUM threshold. The calculation is based on the daily average AUM of domestic mutual fund schemes for each of the past six months, ending on June 30 and December 31 of each year. For mutual fund schemes that track multiple indices, the AUM is allocated proportionally among the tracked indices. In cases involving an "index of indices," the AUM of underlying indices is included based on their respective weights in the composite index.

Registration Requirements and Timeline

Under the proposed framework, providers of identified Significant Indices must submit an application for registration as an Index Provider within six months from the date of issuance of the final circular. However, this registration requirement will not apply to providers whose significant indices are already regulated by the Reserve Bank of India (RBI), avoiding regulatory overlap and duplication.

Enhanced Governance and Grievance Mechanism

The proposal aims to increase transparency and accountability in financial benchmarks through structured governance measures. The grievance redressal mechanism will apply specifically to Significant Indices provided by Index Providers registered with SEBI, ensuring that investor concerns and disputes related to these benchmarks have a formal resolution pathway.

Public Consultation Process

SEBI has invited public comments on the proposed regulatory framework until January 30, demonstrating its commitment to stakeholder consultation in policy development. This consultation period allows market participants, Index Providers, and other stakeholders to provide feedback on the proposed measures before final implementation.