INTRODUCTION
The asset management industry is undergoing a regulatory rethink, which aligns with the SEBI’s broader aim of ease of doing business. The recent SEBI consultation paper dated 7 July 2025, on review of permissible business activities of the asset management companies (AMCs) provides a liberalised view by broadening the ambit of permissible business activities of AMCs. In particular, relaxations are proposed to allow AMCs to manage non-broad-based funds (NBBFs) subject to certain terms and conditions.
This article is structured into three key parts. Firstly, it delves into the backdrop of the current proposal. Secondly, it outlines the core elements of the proposal. Finally, the article analyzes the two different approaches proposed by SEBI regarding differential fees for broad-based funds (BBFs) and NBBFs while also assessing the practical viability of the proposed changes regarding the performance fee.
THE BACKDROP OF THE CURRENT PROPOSAL.
Currently, the business activities undertaken by the AMCs are regulated by Regulation 24 of the Mutual Funds Regulations (MF Regulations). Particularly, Regulation 24(b) restricts the business activities of AMCs to fund management and advisory services only in relation to pooled investment vehicles. The pooled funds referred here are BBFs, which must have at least 20 investors, with each investor’s contribution capped at 25% of the total corpus. This is in contrast to NBBFs, which are privately pooled vehicles and do not have such restrictions. They are specially designed for investors like High Net Worth Individuals (HNWIs) or family offices having a higher risk appetite.
Thus, under the current regime, the AMCs are not allowed to manage the NBBFs directly under their broad pooled structure. However, the AMCs willing to serve in the NBBF category are allowed to do so through the Portfolio Management Services (PMS) route. This route allows them to set up a separate arm to manage customized segregated portfolios for clients such as HNWI and family offices. The rationale behind this is to prevent any conflict of interest (COI) arising between the two sets of investor categories. However, from AMCs’ perspective, this imposes an added layer of compliance leading to increased costs for them despite having the expertise and resources.
Pursuant to the abovementioned concern, a memorandum was submitted to SEBI requesting a review. However, the committee observed that Chinese Wall mechanisms are ineffective in managing COI. These mechanisms commonly refer to the internal barriers that segregate resources and teams to prevent the flow of confidential information that may cause risk of COI. The committee specifically identified that the real COI arises out of the differing remuneration models charged by the AMCs for NBBFs, as they are performance-linked. Thus, an AMC may divert material information or resources towards NBBFs, which might lead to unfair investor treatment of BBFs. The committee ultimately adopted a prohibitory approach and concluded to restrict the activities of the AMCs to BBFs. This led to the addition of the term “pooled asset” under Regulation 24(b) of the MF Regulations.
WHAT THE CURRENT PROPOSAL PROVIDES?
The proposal can be categorized broadly into three points. Firstly, in order to resolve the issue of fee differential in NBBFs, two approaches have been proposed. The first approach provides for a cap and floor on the management and advisory fee, which will be aligned to the total expense ratio (TER) of other similar mutual fund schemes. Thus, a range will be set for the AMCs to charge such fees. The second approach does not set any absolute limits on fees, rather it provides for a relative cap on the basis of the permissible difference between the fees charged for NBBFs and comparable mutual fund schemes. This will allow the AMCs to charge only a certain percentage higher or lower than the TER of a comparable mutual fund. Another proposal pertains to the performance fee charged by the AMCs for NBBFs. SEBI has proposed a complete ban on performance-based fees charged by AMCs for NBBFs. Additionally, the AMCs will now be required to disclose the performance of such funds in comparison to comparable mutual funds on half yearly basis along with certain other additional monitoring mechanisms.
ANALYSIS
Regarding fee capping by AMCs, it is appreciated that SEBI has adopted a balanced approach by allowing AMCs to deal in NBBFs although with some restrictions, including the fee cap. The author believes that the second approach must be adopted as it aligns with the broader objective of ease of doing business. Firstly, it aims to strike a right balance between flexibility and investor protection. Unlike absolute limits under the first approach, the second approach allows space for a modest premium fee to be charged while simultaneously preventing potential abuse through clear fee boundaries. Additionally, the performance and board-level disclosure obligations related to such fees contribute to a more robust fee mechanism. Secondly, it provides for a price band that allows flexibility for HNWIs and family offices who often prefer liberalized fee structures and have a higher risk appetite. This can further enhance participation in the NBBFs category, ultimately strengthening the demand base of the AMC management services. Thirdly, considering the current market trend of enhanced demand for varied asset classes like NBBFs among HNWIs and family offices it is evident that such avenues are becoming equally rewarding and lucrative for such category of investors. The recent report by Julias Baer made in collaboration with EY,( report) highlights that, though mutual funds capture the broader management market, the alternative avenues available have potential for higher alpha return in niche markets such as digital finance. The report also underscores the supplementary nature of such NBBFs, noting that while mutual funds provide the bedrock of a diversified equity portfolio, the alternative avenues enhance the potential for alpha generation and targeted exposure specifically in industries like real estate.
Further, it is pertinent to note that mutual funds come with stringent regulatory norms and resource limits that stifle the flexibility of their fund structures. This makes HNWIs and family offices shift to fund structures such as NBBFs which provide greater flexibility while catering to their specific return expectations. This makes it crucial that the fee structure offers some flexibility. Thus, while India’s proposal to expand permissible activities is appreciated, it must be implemented with a flexible approach as reflected in the second approach, in order to tap the growing potential of this booming market.
On the issue of performance-linked fees, the SEBI has proposed a blanket ban on such fee structures. This is in contrast with the capped fees allowed under Regulation 52 of the MF Regulations. This move stems from the concern that since the profits are directly linked to the fund performance the AMCs may be motivated to secure better performance for NBBFs at the cost of compromising the interest of BBFs. Additionally, SEBI has expressed concerns over the possibility of discounted fees for NBBFs leading to cross-subsidization of resources. However, this approach appears to be overly restrictive. Performance fee often align the AMC’s interests with that of the investors, leading to better fund management. Potential COI can be effectively managed through enhanced disclosures that ensure fees are genuinely linked to the fund’s outperformance. It is worth noting that the current SEBI proposal was initiated to address concerns that AMCs were being unfairly disadvantaged in managing NBBFs. Denying them performance fees now, while allowing it for AIFs and PMS, would effectively reset progress and reinstate that disadvantage.
Given these considerations, SEBI has in the recent past taken steps to enhance disclosures and standardization in the context of performance fees, such as introducing benchmarking norms. However, these norms are more specific to returns associated with such fee structures. Additionally, in the current proposal SEBI requires compliance with conditions under Regulation 24(b). However, it is suggested that a more nuanced and principle-based approach must be adopted specific to performance-fee-related risks. Taking a cue from the EU, India should come up with enhanced disclosure about excessive risk taking by them and ensure that managers charge a performance fee that allows them reasonable incentives for genuine outperformance. Alternatively, a dedicated committee to oversee conflicts related to performance fees can be made similar to the Unit Holder Protection Committee under the current proposal for fee differentials.
CONCLUSION
While SEBI’s proposal for AMCs is appreciated, some measures appear piecemeal. For years, AMCs have missed opportunities related to NBBFs due to SEBI’s outright rejection of the efficacy of Chinese Walls which resulted in a complete ban for AMCs to deal in NBBFs. However, this rigid stance is counterproductive as it is based on the premise that conflicts in NBBFs are inevitable and that it cannot be resolved. This approach runs contrary to the booming asset management market which requires regulation with flexibility. SEBI should adopt a facilitative approach as it has done earlier in the context of merchant bankers. The SEBI first prohibited merchant bankers from carrying out valuation activities due to COI concerns, however, it was later withdrawn. Adopting a similarly balanced approach for AMCs would encourage innovation and robust investor safeguards.
(This post has been authored by Anshika Kaushik, a fourth-year student at NLIU, Bhopal)
CITE AS: Anshika Kaushik ‘BETWEEN FREEDOM AND CONTROL: SEBI’S REFORMS FOR ASSET MANAGEMENT COMPANIES’ (The Contemporary Law Forum, 26 September 2025) <https://tclf.in/2025/09/26/between-freedom-and-control-sebi’s-reforms-for-asset-management-companies> date of access.