The Securities and Exchange Board of India (Sebi) has issued a significant clarification regarding the regulatory obligations of Asset Management Companies (AMCs) and their subsidiaries when they provide management or advisory services to Alternative Investment Funds (AIFs).
The regulator emphasized that these entities must adhere to stringent “broad-based” fund criteria, a move designed to ensure that AIFs are not used to bypass the spirit of mutual fund diversification rules.
Key Clarifications from Sebi:
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Scheme-Level Compliance: Sebi clarified that compliance with diversification and broad-based norms must be assessed at the individual scheme level, rather than the overall fund level. Each AIF scheme is to be treated as a distinct investment vehicle that must independently reflect a diverse investor mix.
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The 20-25 Rule: Under the informal guidance issued to UTI Alternatives, Sebi noted that AIFs fall under the definition of “pooled assets.” Consequently, they must follow the “broad-based” requirement: having at least 20 investors, with no single investor holding more than 25% of the fund’s corpus.
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Master-Feeder Restrictions: The guidance removes previous flexibility regarding master-feeder structures. Sebi ruled that even if a feeder fund does not make independent investment decisions, both the master and the feeder funds must individually satisfy the broad-based requirements.
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No “Look-Through” for Domestic Entities: Sebi denied domestic institutions—such as banks, insurance companies, and provident fund trusts—the same “look-through” exemptions currently available to certain Foreign Portfolio Investors (FPIs). These domestic entities must operate strictly within their own regulatory frameworks.
Industry Impact
Legal experts note that this clarification effectively introduces a “new rule” by providing a strict interpretation of “pooled assets” within the 2026 Mutual Fund regulations. The move signals a stricter regulatory stance aimed at preventing AMCs from using layered institutional structures to circumvent investor diversification norms.
This development follows recent Sebi board decisions aimed at balancing market flexibility with oversight, including new rules for “inoperative funds” and the retention of liquidation proceeds for pending tax and legal liabilities.
