Description

Amendment to SEBI Mutual Funds Regulations, 1996 introducing changes to investment limits for Specialized Investment Funds in REITs and equity paid-up capital, and modifications to cash holding requirements.

Summary

SEBI has notified the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Regulations, 2025, effective from October 31, 2025. This amendment modifies the SEBI (Mutual Funds) Regulations, 1996, introducing key changes to investment concentration limits for Specialized Investment Funds, inclusion of REIT units in the definition of equity derivatives, and revised cash holding requirements for mutual fund schemes.

Key Points

  • Amendment to definition of equity derivatives to include REIT (Real Estate Investment Trust) units
  • Cash holding requirement increased from 95% to 97% under Regulation 49(3)
  • Modified investment limits for Specialized Investment Funds in single company paid-up capital and REIT units
  • Aggregate mutual fund holding limit of 10% in voting rights or REIT units of single issuer maintained
  • Additional restriction: If a mutual fund holds 10% across all schemes, Specialized Investment Funds limited to 5% additional holding
  • Removal of specific REIT-related provisions from certain regulations
  • Regulations effective from date of publication in Official Gazette

Regulatory Changes

Chapter I - Regulation 2(1)(ञक) Amendment

Inclusion of “REIT (Real Estate Investment Trust) units” in the definition of equity derivatives, expanding the scope of instruments covered.

Chapter VI - Regulation 49(3) Amendment

Cash holding requirement increased from 95% to 97%, tightening liquidity management requirements.

Chapter VI-C - Regulation 49AA Amendments

Sub-regulation (2):

  • Specialized Investment Funds cannot hold more than 15% of voting rights paid-up capital of a single company across all investment strategies
  • Specialized Investment Funds cannot hold more than 15% of REIT units issued by a single issuer
  • Explanation: Where a mutual fund already holds 10% across all schemes in either voting rights of a company or REIT units of an issuer, the Specialized Investment Fund is restricted to maximum 5% additional holding

Sub-regulation (3): Replacement of “company” with “entity” for broader application

Sub-regulation (4): Removal of “REIT and” references from multiple clauses:

  • Main provision
  • Clause (a)
  • Clause (b)(i)
  • Clause (b)(ii)
  • Proviso to Clause (b)

Chapter VII - Regulation 52(6A)

Deletion of Clause (b)

Seventh Schedule - Clause (2) Amendment

Replacement of existing text with: “No mutual fund under all its schemes shall hold more than 10% of voting rights paid-up capital of a single company or 10% of REIT units issued by a single issuer”

Compliance Requirements

  • All Mutual Funds: Must comply with revised 97% cash holding requirement under Regulation 49(3)
  • Specialized Investment Funds: Must adhere to new concentration limits:
    • Maximum 15% holding in voting rights of single company across all strategies
    • Maximum 15% holding in REIT units of single issuer
    • Maximum 5% holding if parent mutual fund already holds 10% across all schemes
  • Asset Management Companies: Review and adjust existing portfolios to ensure compliance with amended limits
  • Compliance Teams: Update internal policies and monitoring systems to reflect new investment restrictions
  • Risk Management: Implement controls to track aggregate holdings at mutual fund and Specialized Investment Fund levels

Important Dates

  • Notification Date: October 31, 2025
  • Effective Date: Date of publication in the Official Gazette (October 31, 2025)
  • Immediate Compliance Required: All provisions are effective immediately from publication date

Impact Assessment

Market Impact:

  • Increased liquidity requirements (97% cash holding) may affect short-term deployment strategies
  • REIT market participation by Specialized Investment Funds subject to stricter concentration limits
  • Enhanced diversification requirements may lead to portfolio rebalancing

Operational Impact:

  • Asset Management Companies need to review existing holdings for compliance
  • Portfolio managers must adjust investment strategies for Specialized Investment Funds
  • Compliance monitoring systems require updates to track new limits
  • Potential portfolio restructuring if current holdings exceed new limits

Investor Protection:

  • Reduced concentration risk through stricter investment limits
  • Better diversification across mutual fund schemes
  • Enhanced safeguards against over-exposure to single entities

Fund Management:

  • More stringent requirements for Specialized Investment Funds investing in REITs
  • Coordination required between parent mutual fund and Specialized Investment Fund holdings
  • Impact on investment flexibility for funds near concentration limits

Impact Justification

Major regulatory amendment affecting mutual fund investment limits and operational parameters, particularly for Specialized Investment Funds dealing with REITs and equity investments.