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SEBI may review mutual fund categorisation norms

The Securities and Exchange Board of India (SEBI) is mulling a review of its regulatory framework for categorisation of mutual funds (MFs) as market participants have sought a dynamic classification of companies instead of the current static mechanism wherein listed entities are ranked on the basis of market capitalisation.


According to persons familiar with the development, a meeting between SEBI officials and market participants was held recently wherein this matter was raised while highlighting practical issues faced by fund houses and fund managers, especially in the context of small-cap funds.


The matter goes back to October 2017 when SEBI came out with the guidelines for categorisation of MF schemes. Large cap MFs, it said, were those which invested only in the top 100 companies in terms of market capitalisation.


Mid-cap funds were those which invested in the next 150 companies and small-cap funds were those which invested in companies below the rank of 251 in terms of market capitalisation. Going by the latest market capitalisation of companies listed on the BSE, firms with a valuation of about ₹8,500 crore end up in the small-cap category.


“For small-cap funds, the SEBI categorisation has made the band of market capitalisation in the current scenario fairly large leading to issues in terms of stock selection,” said a person familiar with the discussions.


“The view is that it would be better if the SEBI comes with a dynamic band or lays down a range in terms of market capitalisation for identifying firms as large-cap, mid- cap and small-cap.


“That would also take care of the impact of the market volatility on the valuation of the companies,” he added wishing not to be named.


Incidentally, if one takes into account the top 1,000 companies of the BSE, then the small-cap category, as laid down by the SEBI, would include entities with a valuation in the range of ₹8,500 crore to as low as ₹470 crore.

To be sure, the regulator has not yet initiated any further discussion to review the current framework even as the Advisory Committee on Mutual Funds is scheduled to meet later this week.


“Any kind of classification should be dynamic in nature,” said Dhirendra Kumar, chief executive officer, Value Research, a mutual fund tracking firm. “It must be designed in a manner that it changes automatically with the change in market conditions. A large cap can change into a small cap when the market situation changes,” he added.

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