Sebi eases fund exits, cuts FPI costs, tightens oversight

India’s market regulator on Monday eased rules for investment funds and foreign investors while tightening oversight of its own officials, in a set of changes aimed at reducing friction in markets without weakening safeguards.

The Securities and Exchange Board of India (Sebi) approved the measures at its 23 March board meeting, targeting fund closures, trading costs, retail participation and governance standards.

The most immediate relief is for alternate investment funds (AIFs) that pool money into assets such as startups, private companies and complex strategies.

These funds were earlier required to return all money and close accounts before exiting. In practice, many remained stuck because of pending tax claims, legal disputes or leftover expenses.

Sebi has now allowed such funds to retain some money after their tenure ends if there are genuine liabilities or investor approval. Funds that have effectively stopped investing can be classified as “inoperative,” allowing them to wind down with fewer compliance requirements.

The change removes a long-standing inefficiency that kept funds alive on paper while adding compliance costs.

Foreign investors are also set to benefit from a change in how trades are settled.

Under the current system, investors must separately fund purchases and receive money from sales, even if both happen at the same time. Sebi will now allow these transactions to be offset within a settlement cycle, reducing the need to move large sums of cash back and forth.

The move is expected to lower funding costs and currency risks, especially during index rebalancing when large buy and sell orders coincide. The new system will be implemented by the end of 2026.

In a separate step, Sebi has opened up social impact funds to small investors by cutting the minimum investment to ₹1,000 from ₹2 lakh.

These funds channel money into social and development projects. The lower threshold is likely to broaden participation, though it also shifts more responsibility onto investors to assess risks in a relatively new segment.

The regulator also eased rules for listed vehicles that own infrastructure and real estate assets such as highways, power networks and office properties.

These entities will now have greater flexibility in holding assets beyond project timelines, deploying surplus cash and investing in projects that are still under construction within defined limits.

The changes reflect the reality that infrastructure projects often outlast contractual deadlines due to legal and operational issues.

Alongside these measures, Sebi revised its criteria for deciding who can operate in the securities market.

The updated framework makes clear that the existence of a complaint or investigation does not automatically disqualify an applicant. At the same time, confirmed violations, including economic offences and breaches of securities laws, remain grounds for disqualification.

Meanwhile, the most significant tightening is within Sebi itself.

The regulator has introduced stricter conflict-of-interest rules for its chairman, senior officials and employees. These include limits on stock market investments, mandatory disclosure of assets and liabilities and requirements to declare any discussions about future jobs.

Senior officials will be required to sell, freeze or formally manage their existing market holdings when they take office and will be treated as insiders under market rules. Some asset disclosures, including property holdings, will be made public in line with government norms.

Sebi also plans to introduce a formal ethics framework supported by digital systems to track disclosures and manage conflicts.