Sebi may reclassify mid cap, small cap mutual funds to offer more flexibility


The Securities and Exchange Board of India (Sebi) is looking at reclassification of mid cap and small cap mutual fund schemes, its chief Ajay Tyagi said on Tuesday. The move is aimed at allowing these products to invest in a wider set of stocks, said mutual fund industry officials.

The capital markets regulator has also asked for clarification from Franklin Templeton Mutual Fund on marking down the value of its Vodafone Idea holdings mid-January.

In 2017, Sebi introduced categorisation and rationalisation of mutual funds schemes so that investors could make accurate comparison of schemes. Earlier, each fund house would employ its own criteria for deciding the classification as there was no standard definition.

To ensure uniformity, Sebi issued a list defining large cap, mid cap and small cap companies. The list is prepared once in six months by industry body AMFI (Association of Mutual Funds in India) in consultation with Sebi and stock exchanges.

Fund managers claimed the categorization had taken away their flexibility to invest, resulting in money flowing into a set of stocks. This has impacted performance of mutual fund schemes, said a few fund managers.

“As AMFI releases this list once every six months, there is forced churn as stocks come in and go out of the list,” said a fund manager with a domestic mutual fund.

As per this rule, the top 100 companies in terms of market capitalisation would be considered as large caps, the 101st to 250th companies would be considered as mid-caps and 251st onwards would be considered small caps.

Sebi has also stipulated minimum investment criteria for large, mid and small cap companies. According to this, a large cap fund is required to maintain 80% of its portfolio in large cap stocks, while a mid cap and small cap fund would have to maintain a minimum of 65% of its portfolio in these stocks.

Fund houses were divided over a change in this list. While some believed it is too early to look at a change as they are just getting used to the classification norms, a section believed the lists should be expanded to give fund managers higher flexibility.

Separately, Tyagi said the regulator had sought comments from Franklin Templeton Mutual Fund, when they marked down Vodafone Idea’s securities to zero, even before they were downgraded below investment grade.

“We have asked for their comments. It is fund houses’ domain to take a view on its asset value formulation,” Tyagi said. He was speaking on the sidelines of NSE’s launch of RFQ (Request for Quote) platform in debt securities.

Last month, Franklin Templeton Mutual Fund decided to segregate the bonds of Vodafone Idea held in its debt schemes after credit rating agencies cut the telecom company’s securities to below investment grade.

On NSE’s proposed IPO, Tyagi said the regulator is also examining the legal aspects of the issue and will take a call soon. NSE has approached Sebi to seek its approval for the IPO before it could appoint merchant bankers. NSE’s listing plans were put on hold after Sebi barred it last year in April from accessing the capital markets for a period of six months.