Introduction
Securities and Exchange Board of India (SEBI) released a consultation paper on proposing a comprehensive restructuring of Regulation 24 of the SEBI (Mutual Funds) Regulations, 1996 on July 7, 2025. The objective of the paper is to increase the scope of permissible business activities for Asset Management Companies (AMCs), including a relaxation of the broad-basing requirement, to manage non-broad based pooled funds, and better operational flexibility through ancillary functions and resource sharing mechanisms.

While SEBI’s intent is to foster innovation and competitiveness within the Indian asset management ecosystem, the proposals, in substance, call for a material shift towards deregulation. By making it easier for AMCs to simultaneously also service the retail investors.

This blog argues that the proposals, compromise the foundational principle of investor protection which is of core importance within mutual fund regulation. At a time when retail participation in capital markets is at its peak, the regulatory priority must remain the protection of investor’s trust not the commercial expansion of AMCs.

Legislative Intent
Regulation 24(b) of the SEBI (Mutual Funds) Regulations, 1996, regulates the scope of permissible business activities for Asset Management Companies (AMCs). It restricts AMCs from engaging in any business other than the management and advisory of pooled assets such as mutual funds, offshore funds, pension funds, insurance funds, and other broad-based investment vehicles subject to SEBI’s regulatory framework. The provision further prohibits AMCs from managing or advising non-broad-based funds, i.e., funds with fewer than 20 investors or those where a single investor holds more than 25% of the corpus. AMCs wishing to manage such mandates must obtain a separate Portfolio Management Services (PMS) license.

These restrictions were introduced in 2011 following recommendations from a SEBI constituted committee formed in response to the Association of Mutual Funds in India (AMFI). The committee observed that conflicts of interest particularly arise from differential fee structures, preferential resource allocation, and informational arbitrage could not be adequately mitigated merely through Chinese walls or operational segregation. As a result, Regulation 24(b) was amended to explicitly prohibit AMCs from pursuing overlapping commercial activities that might compromise the fiduciary obligation owed to retail mutual fund investors.

The recommendation by SEBI includes the relaxation of the broad-basing requirement, enabling AMCs to service non-broad based pooled funds, and permitting them to execute activities such as acting as Points of Presence (POP) under PFRDA regulations or as global distributors of funds. In addition, AMCs and PMS businesses may be allowed to share resources and infrastructure, subject to internal governance controls and broad oversight. The relaxation of Regulation 24(b), long regarded as a problem mitigator, demands scrutiny given its potential implications for investor protection, market integrity, and AMC accountability.

Key Risks Involved
While SEBI lists several supervisory and operational safeguards to support the proposed relaxation of Regulation 24(b), the structural risks inherent in permitting AMCs to manage non-broad based pooled funds cannot be overlooked. The very rationale that led to the 2011 restrictions conflict of interest, preferential treatment, and compromised governance remains as relevant today as it was over a decade ago.

The following key concerns emerge from the proposed framework:

1. Fee Differentiation and Resource Diversion
   The key concern of SEBI’s regulatory framework for mutual funds lies in the principles of fairness and fiduciary accountability. Under the current regime, mutual fund schemes are subject to a capped Total Expense Ratio (TER), with equity-oriented schemes limited to a maximum of 2.25% as per Regulation 52 of the Mutual Funds Regulations. By contrast, non-broad based pooled funds, if permitted could negotiate bespoke fee arrangements, including performance-linked incentives, which are expressly disallowed under mutual fund regulations.This disparity introduces an economic incentive for AMCs to prioritize high-value clients, diverting their most skilled fund managers, research analysts, and technological infrastructure toward those mandates that yield greater commercial returns. Over time, such resource diversion could result in suboptimal fund management for retail investors and distort the internal allocation of investment expertise, thereby breaching the fundamental principle of equal treatment.
2. Front-running and Insider Trading
   Allowing AMCs to simultaneously manage retail mutual funds and high-net-worth pooled mandates opens the door to potential misuse of non-public information. Fund managers with dual mandates may gain access to large trades planned under mutual fund schemes and use that information to place strategic trades in favor of non-broad-based clients. Such conduct, although explicitly prohibited under the SEBI (Prohibition of Insider Trading) Regulations, 2015, would prove to be difficult to detect or prove, especially where the entities share management personnel and infrastructure.India’s current surveillance mechanisms are still evolving, and unlike jurisdictions such as the U.S. or U.K., India lacks a concrete culture of class-action litigation or punitive damages that could deter such misconduct. The contradiction in oversight between intention and enforcement must therefore be acknowledged.
3. Weak Safeguards and Enforcement Limitations
   SEBI proposes several governance-based solutions, including oversight by the Unit Holder Protection Committee (UHPC), bi-annual disclosure of fund performance comparisons, and internal policies to justify fee differentials. However, these mechanisms appear more reactive than preventive.SEBI’s own consultation paper does not elaborate on how it will actively monitor, audit, or enforce compliance with these safeguards on a real-time basis. The effectiveness of Chinese walls, disclosure norms, or committee oversight is questionable in an environment where financial incentives outweigh fiduciary controls. Without active regulatory surveillance, these safeguards risk becoming procedural formalities rather than substantive protections.

International Jurisdictions
It is often argued that global Asset Management Companies (AMCs), particularly those operating in jurisdictions such as the United States or the United Kingdom, routinely manage both retail and institutional mandates without regulatory conflict. However, this comparison fails to account for enforcement frameworks in such jurisdictions.

For instance, in the United States, the Securities and Exchange Commission (SEC) imposes stringent fiduciary obligations, mandatory disclosures, and frequent compliance examinations on registered investment advisers. These requirements are enforced through class-action suits, whistleblower protections, and institutional investor activism all of which act as powerful deterrents against any sort of misconduct.

On the contrary, the Indian regulatory, while increased the scope and strengthened in recent years, still lacks mechanisms such as class-action litigation with financial deterrents, deep forensic audits, or real-time compliance testing of fiduciary breaches. Enforcement is largely dependent on ex post facto investigations by SEBI, with limited scope for direct investor recourse in cases of selective treatment or conflict of interest.

Therefore, integrating international flexibility into the Indian capital market without equivalently strong enforcement framework is not only premature but may also expose retail investors to heightened systemic risk.

Principle Issue
SEBI’s proposal to dilute the regulatory firewall established under Regulation 24(b) arrives at a time when retail participation in India’s mutual fund industry is witnessing unprecedented growth. Systematic Investment Plans (SIPs) have become mainstream financial instruments for the middle class, and mutual funds are increasingly viewed as a credible long-term wealth-building avenue. In this context, trust in regulatory fairness is not merely a procedural requirement it is the very foundation on which investor confidence rests.

India’s regulatory strength has been rooted in its conservative, investor-first approach. The strict segregation of mutual fund operations from higher-risk advisory or private wealth mandates has reinforced the perception of mutual funds as transparent and retail-friendly. Leaving aside these boundaries risks unsettling this trust and may at the end disincentivize the very retail investors whom SEBI has worked tirelessly to empower.

Moreover, pathways for innovation and commercial expansion already exist within the current regulatory framework. Alternative Investment Funds (AIFs), International Financial Services Centres (IFSCs), and separately licensed PMS subsidiaries offer ample flexibility for AMCs to diversify operations without encroaching upon the mutual fund space. These frameworks permit differentiated fee structures and customized mandates, all while preserving the sanctity of retail investment channels.

Thus, while regulatory upgradation is necessary, it must not come at the cost of undermining the credibility of the mutual fund ecosystem. Reform, to be sustainable, must not sacrifice foundational investor protections for marginal operational convenience.

Conclusion
SEBI must look out for the integrity of mutual fund regulation over capital flexibility. While the objective of increasing the scope AMC competitiveness and diversifying permissible activities is understandable, the current proposals under the July 2025 consultation paper risk diluting critical safeguards that protect retail investors from conflict of interest, preferential treatment, and resource diversion.

If reform is to be pursued, SEBI should consider adopting a phased or conditional pilot framework, limited to a select category of AMCs under heightened scrutiny, with real-time disclosure obligations and third-party audits. This would allow for data audits without exposing the broader mutual fund market to premature risk.