SEBI increases group/sponsor level exposure to up to 35% for passive funds

SEBI has increased the group/sponsor level exposure limit for passive funds from 25% to 35%.

So far, all MF schemes including passive funds could invest up to 25% of the total NAV in group or sponsor level companies. While active funds do not have any problem with this regulation, passive funds find it difficult to mimic the underlying index exactly due to this requirement.

For instance, ABC Nifty 50 Index Fund cannot invest more than 25% of its NAV in ABC Bank and ABC Life Insurance despite the fact that Nifty 50 has 30% weightage in ABC Bank and ABC Life Insurance.

SEBI said, “This restricts the passive funds to effectively replicate the underlying index, in cases where group companies of sponsor comprise more than 25% in the index. This also puts such AMCs to a relative disadvantage as compared to other AMCs who may not have a sponsor group company(ies) comprising more than 25% in the underlying index.”

With this, the regulator has created level playing field across fund houses.