SEBI Proposes AMC Regulation Overhaul Amid Conflict of Interest Concerns
SEBI AMC Regulation Overhaul: Mutual Fund Rules May Change Amid Conflict Concerns
🏦 SEBI AMC regulation overhaul Proposal to Redefine AMC Operations in India
In a move that may redefine the operating landscape for Asset Management Companies (AMCs), the Securities and Exchange Board of India (SEBI) has proposed a comprehensive revamp of Regulation 24(b) under the SEBI (Mutual Funds) Regulations, 1996. The suggested changes aim to balance industry demands for flexibility with rigorous investor protection norms in the face of rising conflict of interest risks.
The move has stirred strong reactions from both the mutual fund industry, represented by AMFI, and legal experts advising financial institutions.
📜 Understanding the Current Framework: What Is Regulation 24(b)?
As it stands today, Regulation 24(b) restricts AMCs from engaging in any business activity other than managing or advising broad-based pooled assets such as:
- Mutual funds (retail investor-heavy)
- Offshore funds
- Insurance/pension/provident funds
- Select foreign portfolio investors (FPIs)
For managing non-broad-based assets (e.g. funds with <20 investors or where one investor contributes >25% of the corpus), an AMC must obtain a Portfolio Management Services (PMS) licence—ensuring operational and regulatory separation.
This provision was first introduced in 2011 based on committee recommendations to minimise conflicts of interest.
📈 What SEBI Now Proposes
SEBI’s July 2025 consultation paper proposes amending Regulation 24(b) to allow AMCs to manage both broad-based and non-broad-based pooled funds under the same entity, subject to strict regulatory safeguards.
The move responds to long-standing industry demands for greater operational flexibility, especially from AMCs arguing that the “broad-based” clause is outdated and places them at a competitive disadvantage vis-à-vis other intermediaries offering similar advisory services.
🧠 Industry Perspective: A Call for Ease of Doing Business
The Association of Mutual Funds in India (AMFI) has long advocated for relaxing these restrictions, stating that:
- AMCs already possess the expertise to manage diverse fund structures
- Current rules restrict growth opportunities in high-margin client segments
- A level playing field is essential, especially as international asset managers face fewer such restrictions
⚠️ SEBI’s Concerns: Conflict of Interest Risks Cannot Be Ignored
SEBI’s proposal is not without caveats. The regulator has squarely flagged serious risks if AMCs are allowed to manage different classes of pooled funds under the same umbrella:
1. Incentive Misalignment
Higher fees in bespoke non-broad-based funds could encourage AMCs to:
- Allocate top-performing fund managers away from retail mutual funds
- Undermine cost allocation fairness
- Deprioritise retail performance
2. Insider Trading & Front-Running
There is a real risk that fund managers may use confidential trade data from mutual funds to benefit non-broad-based clients:
- By taking opposite positions
- Engaging in front-running
- Skewing execution costs
“Differential fee models may skew AMC behaviour towards high-fee clients at the cost of retail mutual fund holders,” explained Akshaya Bhansali, Partner, Mindspright Legal.
🔄 Transfer Risk: Misuse of Low-Quality Assets
SEBI is also concerned about misallocation of risk between different client categories. For example:
- Shifting low-rated or default-prone debt from bespoke portfolios to large mutual fund schemes
- Compromising fiduciary obligations to retail investors
🔒 SEBI AMC regulation overhaul Safeguards to Address These Conflicts
SEBI has outlined several checks and balances to mitigate these risks if the proposed changes are approved:
✅ 1. Fee Governance
- Upper and lower limits (cap and floor) on management and advisory fees
- Performance-linked fees strictly controlled
- Fee parity where portfolios overlap significantly
✅ 2. Functional Segregation
- Separate fund managers and back-office teams for mutual funds and non-broad-based clients
- Overlap permitted only if portfolios are 70%+ identical
✅ 3. Trade Monitoring Controls
- Application of 6-month contra trade restrictions
- Strict internal trade allocation policies
- Mandatory logs and audit trails for trade decisions
✅ 4. Transfer Restrictions
- No direct security transfers between mutual funds and non-broad-based clients
✅ 5. Insider Trading Compliance
- Prohibit use of confidential mutual fund information
- Enforce full compliance with SEBI insider trading rules
“These guardrails are crucial to prevent AMCs from prioritising lucrative clients while compromising fiduciary responsibility towards retail investors,” Bhansali added.
🧑⚖️ Legal Viewpoint: A Balancing Act
Ketan Mukhija, Partner at Burgeon Law, supports the diversification benefits but cautions:
“While the proposed relaxations can help AMCs grow into adjacent verticals, the potential for conflict, insider misuse, and investor harm is equally strong—necessitating robust compliance and clear functional segregation.”
📣 Public Feedback Invited
SEBI has invited public comments on this proposal until 28 July 2025. This period is crucial for stakeholders, AMCs, legal advisors, SEBI AMC regulation overhaul and investor representatives to weigh in on whether the revised framework ensures “flexibility without dilution of responsibility.”
🧾 Summary Table: What’s Changing and Why It Matters
| Aspect | Current Rule (Reg. 24b) | Proposed Change |
|---|---|---|
| AMC Scope of Business | Restricted to broad-based pooled assets | Extended to non-broad-based clients (with safeguards) |
| PMS License Requirement | Mandatory for bespoke clients | May be merged within AMC structure |
| Key Conflict of Interest Risk | Resource diversion, insider trading, cost distortion | Acknowledged and mitigated via guardrails |
| Trade & Fee Controls | NA | Fee caps, separation of teams, trade restrictions |
| Transfer of Assets Between Funds | Permissible under PMS | Prohibited in AMC dual-role model |
📘 Disclaimer
This blog is prepared for informational and educational purposes only. It provides a summary of SEBI AMC regulation overhaul consultation paper on proposed amendments to Regulation 24(b) of the Mutual Funds Regulations. Readers are advised to consult legal, compliance, or investment professionals before acting on any regulatory developments.
Estabizz Fintech disclaims liability for any actions taken based on this content. For compliance assistance or advisory on AMC structuring, licensing, or PMS guidelines, visit www.estabizz.com.
SEBI’s New Circular and Its Impact on Brokerage Firms
