Description

SEBI introduces monitoring mechanism for minimum investment threshold of INR 10 lakh in Specialized Investment Funds, including automatic redemption process for breach violations.

Summary

SEBI has issued detailed guidelines for monitoring compliance with the Minimum Investment Threshold of INR 10 lakh under Specialized Investment Funds (SIF). The circular establishes a mechanism where active breaches result in unit freezing, a 30-day rebalancing notice period, and automatic redemption if non-compliance persists. This framework ensures continuous compliance with minimum investment requirements while providing investors an opportunity to rectify breaches.

Key Points

  • AMCs must monitor compliance with Minimum Investment Threshold (INR 10 lakh) on a daily basis
  • Active breach occurs when investor’s total investment falls below INR 10 lakh due to investor-initiated transactions (redemption, transfer, sale)
  • Upon active breach, all units across investment strategies of the concerned SIF are frozen for debit
  • Investor receives 30 calendar days notice to rebalance investments to meet minimum threshold
  • If investor rebalances within 30 days, units are unfrozen with no further action
  • Failure to rebalance results in automatic redemption at NAV of next business day after 30-day notice period
  • AMCs, RTAs, and Depositories must implement necessary systems for this framework

Regulatory Changes

This circular supplements the SIF Circular dated February 27, 2025, and subsequent circulars dated April 09, 2025 and April 11, 2025. Key regulatory changes include:

  • Active Breach Definition: Formally defines “Active Breach” as fall in aggregate investment value below INR 10 lakh across all investment strategies of a SIF due to investor-initiated transactions
  • Automated Enforcement Mechanism: Introduces systematic freeze-notice-redemption process replacing manual monitoring
  • Cross-Strategy Monitoring: Breach monitoring applies across all investment strategies within a SIF, not individual strategies
  • Mandatory Unit Freezing: Requires immediate freezing of all SIF units for debit upon breach detection

Compliance Requirements

For Asset Management Companies (AMCs):

  • Implement daily monitoring systems for Minimum Investment Threshold compliance
  • Ensure no active breaches remain unaddressed
  • Freeze units immediately upon detecting active breach
  • Issue 30-day notice to non-compliant investors
  • Execute automatic redemption if breach not rectified within notice period
  • Prevent investor redemptions that would cause breach below minimum threshold

For Registrar and Transfer Agents (RTAs):

  • Establish systems to support daily threshold monitoring
  • Implement unit freezing/unfreezing mechanisms
  • Process automatic redemptions as per circular requirements

For Depositories:

  • Put in place necessary systems for implementation of monitoring framework
  • Support freeze and automatic redemption processes

For Investors:

  • Maintain minimum investment of INR 10 lakh across all SIF investment strategies
  • Respond to breach notices within 30 calendar days by adding funds
  • Understand that non-response results in automatic redemption

Important Dates

  • Circular Issue Date: July 29, 2025
  • Effective Date: July 29, 2025 (immediate effect)
  • Notice Period for Breach Rectification: 30 calendar days from breach notice
  • Automatic Redemption: Next immediate business day after 30th calendar day of notice period
  • Referenced Circulars: February 27, 2025 (SIF Circular), April 09, 2025, April 11, 2025

Impact Assessment

Market Impact:

  • Establishes clear enforcement mechanism for SIF minimum investment requirements
  • May result in forced redemptions for investors unable to maintain minimum threshold
  • Provides 30-day window reducing immediate liquidity pressure on funds
  • Enhances regulatory certainty for SIF product design and operations

Operational Impact:

  • Requires significant system upgrades by AMCs, RTAs, and Depositories for daily monitoring
  • Introduces automated workflows for breach detection, notification, and redemption
  • Reduces manual intervention and potential compliance gaps
  • Necessitates investor education about minimum threshold maintenance

Investor Impact:

  • Prevents inadvertent fall below minimum investment through transaction restrictions
  • Provides clear remediation path (30-day rebalancing window)
  • Risk of automatic redemption if minimum not maintained
  • Affects investors using stock exchange transactions or off-market transfers

Regulatory Impact:

  • Strengthens SIF framework integrity by ensuring consistent minimum investment compliance
  • Protects investor interests through structured enforcement mechanism
  • Issued under Section 11(1) of SEBI Act, 1992 and Chapter VI-C of SEBI (Mutual Funds) Regulations 1996

Impact Justification

Establishes critical compliance framework for SIF minimum investment monitoring with automatic enforcement mechanisms affecting all AMCs, RTAs, and investors in SIF products.