By Sandeep Parekh,
The current investment landscape in India is designed to cater to various categories of investors. Retail investors typically have access to mutual fund (MF) schemes with a low entry point, while high net-worth individuals (HNIs) and institutional investors can opt for portfolio management services (PMS) with a minimum investment of Rs 50 lakh and alternative investment funds (AIFs) with a minimum investment value of Rs 1 crore. However, there is a notable gap for retail investors who wish to invest, say, Rs 20 lakh in direct equity and who want to take a much higher risk.
To address this issue, the Securities and Exchange Board of India (Sebi) issued a consultation paper dated July 16, proposing a new asset class that will permit asset management companies (AMCs) to offer new sets of investment products, including in derivatives or derivative strategies, to Indian investors. The proposed semi-alternate asset (salt asset) class is aimed at bridging this gap between MFs and PMS and envisaged to provide investors with a regulated investment product with higher risk-taking capabilities.
Without a favourable regulatory architecture, retail investors are increasingly prone to fall for unauthorised investment products, which often promise unrealistically high returns and exploit expectations of better yields. The salt asset, with a return risk profile positioned between MFs and PMS, is intended to provide investors with a secure and regulated option. This new class would serve as a customised investment product offering greater flexibility, higher risk-taking capability, and a higher ticket size.
Sebi has proposed for this to operate under the MF structure but with relaxed prudential norms. To enable existing and newly registered MFs/AMCs to offer products, Sebi has proposed two routes of eligibility criteria. Existing MFs would be required to demonstrate a strong track record by being in operation for at least three years with average assets under management (AUM) of Rs 10,000 crore over the preceding three years, and no regulatory actions during that time. For newly-registered MFs or existing ones that are unable to show a strong track record, an experienced fund manager and chief investment officer with demonstrable experience, and no regulatory actions against the sponsor/AMC in the last three years are required.
Since the products offered under the salt asset class will be relatively riskier than the schemes offered by traditional MFs, there is a need to maintain a clear distinction between the branding of products. To achieve this, Sebi has proposed that the salt asset be branded and advertised as a product distinct from the traditional MFs. This, in Sebi’s view, will ensure that any potential misconduct/failure in the performance does not negatively impact the confidence of retail investors in traditional MFs.
Under the proposal, AMCs can offer “investment strategies” with flexible redemption frequencies tailored to the nature of investments, allowing investment managers to manage liquidity without imposing undue constraints on investors. Importantly, no investment strategy under the salt asset class may be launched by an AMC unless specified by Sebi and approved by the trustees, subject to final observations on the offer documents by the regulator.
Sebi has proposed a minimum investment amount of Rs 10 lakh per investor, across one or more strategies under the salt-y assets offered by an AMC. This threshold, in Sebi’s view, will deter retail investors from investing in this product, while attracting those with funds between Rs 10 lakh and Rs 50 lakh, who are being drawn to unregistered PMS providers, and those who perhaps cannot commit to an AIF, requiring Rs 1 crore per investment.
It has also been proposed that all investments permissible to MFs under the current regulatory framework will also be available for the salt asset. Additionally, it will be permitted to take exposure in derivatives for purposes other than hedging and portfolio rebalancing to allow more flexibility in investments. Investors will also be given the option of systematic plans, including withdrawals and transfers, for investment strategies, though at no point the total invested amount should fall below Rs 10 lakh for reasons other than depletion in the value of investments.
Sebi’s proposal is a significant step towards democratising the securities market. With the proliferation of “finfluencers” and the consequent rise in misinformation, the proposed salt asset offers new avenues for an emerging category of investors who are likely to be drawn towards unauthorised schemes while seeking flexibility in portfolio construction. The initiative also paves the way for adopting thematic investment strategies like electric vehicles, water management, recycling, and renewable energy. The salt asset is likely to attract both the mass affluent and HNI investors by offering them new avenues in emerging sectors.
A salt asset, coupled with the convenience provided by regulated MF platforms, will not only facilitate ease of investment but also promote the concept of domestic MF participation in sophisticated investment strategies, including in long-short equity and inverse exchange-traded fund. That said, Sebi is encouraged to not restrict the proposed product to only AMCs. It should consider permitting other registered intermediaries to offer products under the salt asset as well. Alternatively, it may consider creating an altogether new category of registered intermediary to provide this investment option, which could be regulated by a separate set of rules.
Sebi’s introduction of salt assets reflects its commitment to foster innovation and growth in India’s financial markets, while weaning investors off spicier unregulated products. While the success of this initiative remains to be seen, it promises to create a dynamic and inclusive financial market. This will offer diverse opportunities, catering to the varied needs of Indian investors and contributing to a more robust and resilient financial ecosystem. Like mini-real estate investment trusts introduced by Sebi, this move will bring in players and investors outside the margins of the securities market into a formal, regulated sphere of predictability and regulatory comfort.
The author is Managing partner at Finsec Law Advisors. Co-authored with Navneeta Shankar, associate, Finsec Law Advisors.
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