Description

SEBI circular establishing monitoring mechanism for Minimum Investment Threshold compliance under Specialized Investment Funds, including breach handling procedures and automatic redemption provisions.

Summary

SEBI has issued comprehensive guidelines on monitoring the Minimum Investment Threshold under Specialized Investment Funds (SIF). The circular establishes a structured mechanism for handling breaches where investor holdings fall below INR 10 lakh due to investor-initiated transactions. AMCs must freeze units upon breach detection, provide 30-day notice for rebalancing, and automatically redeem frozen units if compliance is not restored. This framework applies to ITI Mutual Fund’s SIF on BSE StAR MF Platform and all other SIF products.

Key Points

  • AMCs must monitor Minimum Investment Threshold compliance on daily basis with no active breaches permitted
  • Minimum Investment Threshold set at INR 10 lakh aggregate value across all investment strategies of a SIF
  • Active breach defined as fall below threshold due to investor-initiated transactions (redemption, transfer, sale)
  • All units across investment strategies of the concerned SIF to be frozen for debit upon active breach
  • 30 calendar day notice period provided to investor to rebalance investments
  • Automatic redemption at next business day NAV after 30-day notice period if breach not cured
  • Units unfrozen if investor rebalances within notice period
  • Circular effective immediately from date of issuance (July 29, 2025)

Regulatory Changes

SEBI has clarified and operationalized the monitoring mechanism originally specified in the February 27, 2025 SIF Circular (and subsequent April 9 and April 11, 2025 circulars). Key regulatory additions include:

Breach Handling Framework:

  • Introduction of “Active Breach” definition specifically covering investor-initiated transactions
  • Mandatory unit freezing mechanism across all investment strategies upon breach detection
  • Standardized 30 calendar day notice and rebalancing period
  • Automatic redemption protocol at applicable NAV of next immediate business day post-notice period

Scope Clarification:

  • Breach monitoring extends to transactions on stock exchanges and off-market transfers
  • Aggregate value calculation across all investment strategies of a single SIF
  • AMC responsibility to prevent investor holdings from falling below threshold through redemptions

Compliance Requirements

Asset Management Companies (AMCs):

  • Implement daily monitoring systems for Minimum Investment Threshold compliance
  • Ensure no active breaches remain unaddressed
  • Freeze all units of investor across SIF investment strategies upon breach detection
  • Issue 30 calendar day notice to investors in breach
  • Execute automatic redemption of frozen units if breach not cured within notice period
  • Prevent investor-initiated redemptions that would cause threshold breach

Registrar and Share Transfer Agents (RTAs):

  • Put in place necessary systems for monitoring and breach detection
  • Coordinate with AMCs on unit freezing and unfreezing operations
  • Process automatic redemptions as per specified timeline

Depositories:

  • Implement systems to support the monitoring and compliance framework
  • Enable unit freezing/unfreezing mechanisms for SIF holdings
  • Support transaction blocking for investors in breach status

Investors:

  • Maintain aggregate investment value of minimum INR 10 lakh across all investment strategies of SIF
  • Respond to breach notices within 30 calendar days by adding funds to meet threshold
  • Risk automatic redemption of all SIF holdings if threshold not restored

Important Dates

  • July 29, 2025: Circular issuance and effective date - immediate implementation required
  • February 27, 2025: Original SIF Circular establishing regulatory framework (reference)
  • April 9, 2025: Supplementary SIF circular (reference)
  • April 11, 2025: Supplementary SIF circular (reference)
  • 30 calendar days: Notice period from breach detection for investor rebalancing
  • Next business day after 30th calendar day: Automatic redemption execution date at applicable NAV

Impact Assessment

Market Impact:

  • Establishes investor protection framework while maintaining SIF product integrity through minimum threshold enforcement
  • May reduce speculative small-value trading in SIF units on stock exchanges
  • Automatic redemption mechanism provides clear exit pathway for non-compliant investors
  • Enhances market discipline for specialized investment products targeted at sophisticated investors

Operational Impact:

  • AMCs, RTAs, and Depositories must implement new monitoring, freezing, and automatic redemption systems immediately
  • Daily monitoring requirement increases operational overhead for fund administrators
  • 30-day notice period provides reasonable time for investor response while maintaining compliance standards
  • Aggregate value monitoring across multiple investment strategies requires integrated portfolio tracking

Investor Impact:

  • Protects SIF product positioning for investors meeting minimum threshold requirements
  • Forced redemption risk for investors who reduce holdings below INR 10 lakh through sales or transfers
  • 30-day rebalancing window provides opportunity to avoid forced exit
  • May discourage partial redemptions or transfers that could trigger threshold breach

Compliance Impact:

  • Clear operational procedures reduce ambiguity in breach handling
  • Automatic redemption mechanism eliminates prolonged non-compliance situations
  • Daily monitoring requirement ensures proactive compliance management
  • Applies to ITI Mutual Fund SIF and all other AMCs offering SIF products

Impact Justification

High importance as it establishes critical compliance framework for SIF minimum investment monitoring with mandatory automatic redemption provisions affecting all AMCs, RTAs, and depositories handling SIF products.