SEBI Standardises SIF Compliance Within Mutual Funds Framework

On Thursday, the Securities and Exchange Board of India released detailed Compliance Reporting Templates for Specialised Investment Funds (SIF). These documents integrate SIFs into the current Mutual Fund Regulations of SEBI and provide guidance on how to maintain compliance with regulatory obligations established under Form 1 of the SEBI Regulations.
SIFs are intended specifically for sophisticated or institutional investors looking for complex ways of investing. SEBI has also aligned SIFs with the existing requirements set forth by SEBI (Mutual Funds) Regulations, as well as the established requirements under the Master Circular.

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Incorporated Disclosure Approach

Instead of developing a possible SIF-specific reporting system separate from mutual fund obligations, SEBI has revised the standard Compliance Reporting Template and created a new Section IV, covering minimum investment levels, approved investment strategies, fees and expenses, limitations on the percentage of issuers, and derivatives used for portfolio investments.

Increase in the Responsibilities of Trustee(s)

Trustees will have to comply with greater responsibilities under new Clause 72A in their Half-Yearly Trustee Reports. They will have to verify that the Asset Management Companies (AMCs) they oversee have the necessary capabilities, controls, and risk management systems in place in order to facilitate SIFs. 
Also required for verification will be that AMCs have different types of SIFs, comply with branding guidelines, adhere to advertising standards and appropriate investor protection measures. These additional safeguards are essential due to the higher level of leverage and the use of derivatives by SIFs and their focus on high-net-worth (HNW) and institutional investors.

Regulatory Evolution Context

SIFs are new investment products that allow investors to invest in various ways and use multiple strategies. They provide the same flexibility as PMS/AIFs, while still being able to qualify for the tax advantages of a mutual fund. SIFs have a significant advantage over other types of investing because they do not allow for regulatory arbitrage, thereby maintaining investor protection.

Market Implications

SIFs are designed to help investors take advantage of opportunities in the equity market. In India, AMCs manage over 15 lakh crores or 20% of total AUM, with 45 AMCs managing sophisticated products. SIFs give HNIs an opportunity to earn 15% - 20% returns as compared to the Nifty's 12%. The Part IV reporting process enables AMCs to monitor risk on a live basis and avoid the types of excesses that occurred in the derivatives market in 2024.

Implementation Roadmap

To be able to report on Part IV and have a SIF product in compliance with SEBI guidelines, AMCs must upgrade their systems to allow for reporting by quarterly cycles, and trustees must incorporate SIF product reviews into their semi-annual reporting process. This will provide a way for India to have SIFs among other countries, such as Singapore and Hong Kong, that have retail-accessible hedge fund products.