On September 11, 2020, the Securities and Exchange Board of India (“SEBI”), vide circular no. SEBI/HO/IMD/DF3/CIR/P/2020/172 (“Circular”) decided to partially modify the asset allocation of multi-cap fund schemes laid down vide circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 (“2017 Circular”) through which SEBI had issued guidelines regarding categorization and rationalization of mutual fund schemes.

The modified characteristics of the multi-cap fund schemes as per the Circular provide for a minimum investment amounting to 75% of the total assets in equity and equity related instruments in the following manner:

a.    Minimum investment in equity and equity related instruments of large cap companies - 25% of total assets.

b.    Minimum investment in equity and equity related instruments of mid cap companies - 25% of total assets.

c.    Minimum investment in equity and equity related instruments of small cap companies - 25% of total assets

All the existing multi-cap funds were instructed to ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e. January 31, 2021. 

Two days later, SEBI issued a clarification to the Circular vide a press release dated September 13, 2020 (“Press Release”).

Through this Press Release, it was clarified that the 2017 Circular sought to achieve two objectives mentioned below:

a.    True to Label schemes: The portfolio should reflect the name of the scheme and the name of the scheme should correctly reflect the nature of the portfolio.

b.    Comparison with an appropriate benchmark: The scheme performance should be disclosed to the investors vis-a-vis an appropriate benchmark.

SEBI’s Press Release further noted that, multi cap schemes have near zero or insignificant asset allocation to small cap companies. Hence, in order to achieve the objectives of True to Label and Appropriate Benchmark, a need was felt to review the scheme characteristics of multi cap schemes and take necessary steps to clearly distinguish multi cap schemes from other category of schemes. The breakdown of the minimum requirements in the Circular was done in furtherance of the aforementioned two objectives. 

SEBI’s Press Release further clarifies that Mutual Funds have many options to meet with the requirements of the Circular, based on the preference of their unitholders apart from rebalancing their portfolio in the multi cap schemes. 

Please find a copy of the Circular here; a copy of the 2017 Circular here and a copy of the Press Release here.

This update has been contributed by Anurag Prasad (Associate).