The proposal comes as part of a larger consultation paper aimed at reviewing the framework governing permissible business activities for AMCs. SEBI has invited public comments on the paper until July 28, 2025.

At present, AMCs are only allowed to manage and advise on pooled assets that meet the 'broad-based' definition, essentially, funds with at least 20 investors and no single investor holding more than 25% of the corpus. Services to non-broad-based funds currently require a separate Portfolio Management Services (PMS) license.

SEBI noted that this requirement has acted as a barrier, limiting AMCs' ability to compete on equal footing with other intermediaries offering similar services. The industry, led by representations from AMFI, has long called for this regulation to be eased, arguing that AMCs have the expertise to manage such assets, but are unable to tap into the opportunity due to regulatory constraints.

SEBI acknowledged that relaxing the rules could create several conflict-of-interest risks. These include the possibility of higher fees being charged to non-broad-based clients, potential diversion of resources, front-running, and use of insider information from mutual fund operations. There's also concern that AMCs might transfer poor-quality assets between different fund types to the detriment of mutual fund investors.

To mitigate these risks, SEBI has proposed a detailed set of safeguards. AMCs would be required to segregate key personnel, implement automated order management systems, and disclose fee differentials along with performance comparisons between broad-based and non-broad-based funds. A cap or range on fees may also be introduced to prevent preferential treatment.

The regulator is also considering allowing AMCs and their subsidiaries to engage in activities ancillary to fund management. These include acting as Points of Presence (POP) for pension funds under PFRDA’s regulatory framework, and operating as global distributors for funds managed or advised outside India. However, AMCs must ensure that such activities are handled through subsidiaries and remain within the scope of recognized regulatory oversight, either domestically or in foreign jurisdictions.

Another key area under review is resource sharing between mutual fund and PMS units. SEBI has offered two alternatives: either PMS activities be carried out through a separate subsidiary with distinct personnel, or within the AMC as a ring-fenced unit reporting directly to the board, with clear segregation of responsibilities and no overlap in fund management roles.

In both cases, shared use of research resources may be permitted to control costs, but safeguards must be in place to avoid misuse of sensitive information.

SEBI has called for public suggestions on the proposed changes, particularly on the relaxation of the broad-basing requirement, the nature of safeguards required, and the appropriate structure for shared services and new business lines. The consultation paper is available on SEBI’s official website, and feedback can be submitted via a web form or email until July 28, 2025.