SEBI Tightens Timelines for Passive Breach Rebalancing in Mutual Fund Portfolios

Mumbai, June 27, 2025 — The Securities and Exchange Board of India (SEBI) has issued a key clarification via Circular SEBI/HO/IMD/PoD2/P/CIR/2025/92, mandating that all passive breaches across actively managed mutual fund schemes must adhere to the rebalancing timelines outlined in Paragraph 2.9 of SEBI’s Master Circular for Mutual Funds.

SEBI Extends Rebalancing Norms to All Passive Breaches

In its latest directive, dated June 26, 2025, SEBI addressed situations where mutual fund portfolios deviate from their mandated asset allocations, not due to active violations, but as a result of passive breaches. These include instances such as:

• Corporate actions (e.g., mergers, demergers)
• Sharp market movements in underlying securities
• Maturity of underlying instruments
• Large-scale investor redemptions

These events can cause a fund’s asset mix to breach issuer, sector, or group exposure limits without any wrongdoing by the asset management company (AMC).

Key Regulation: Para 2.9 of Master Circular Now Applies Broadly

SEBI clarified that Paragraph 2.9 of its Master Circular for Mutual Funds, which outlines a 30-business-day window for portfolio rebalancing, will now apply to all passive breaches in actively managed schemes, barring Index Funds and Exchange Traded Funds (ETFs). This standardization ensures consistency in breach management and protects investor interests by enforcing timely rectification, regardless of the origin of the breach.

Regulatory Backing and Enforcement

The circular was issued under:

• Section 11(1) of the SEBI Act, 1992
• Regulation 77 of the SEBI (Mutual Funds) Regulations, 1996

These powers empower SEBI to intervene in the interest of market development, investor protection, and regulatory compliance.

Industry Implications

This move is expected to bring multiple benefits:

• Improved risk governance by minimizing prolonged breaches
• Operational consistency across Asset Management Companies (AMCs)
• Greater clarity for fund houses on regulatory expectations
• Stronger investor confidence, especially in volatile markets

About SEBI’s Mutual Fund Oversight

SEBI regulates mutual funds through the SEBI (Mutual Funds) Regulations, 1996. The Master Circular, updated periodically, consolidates key compliance mandates for AMCs and trustees, offering a single-point reference for operational, disclosure, and governance standards.

This regulatory development is aligned with SEBI’s continued focus on strengthening systemic safeguards in India’s ₹54 lakh crore mutual fund industry.

REF: https://www.sebi.gov.in/legal/circulars/jun-2025/timelines-for-rebalancing-of-portfolios-of-mutual-fund-schemes-in-cases-of-all-passive-breaches_94804.html

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