SEBI Circulars — Recent Important Changes
Definition
SEBI circulars are regulatory directives issued by the Securities and Exchange Board of India that amend, clarify, or supplement the mutual fund regulatory framework. These circulars carry the same legal force as the parent regulations and must be complied with by all mutual funds, AMCs, trustees, and distributors. The most significant recent development is the SEBI (Mutual Funds) Regulations, 2026, which replaces the 1996 Regulations effective April 1, 2026 — a complete overhaul streamlined from 162 pages to 88 pages. In addition, SEBI has issued several landmark circulars in recent years that have fundamentally transformed the industry — including TER rationalization (now replaced by the new BER + Brokerage + Levies framework), risk-o-meter implementation, side-pocketing framework, mandatory nomination, pool account prohibition, digital transaction facilitation, portfolio overlap caps, and the voluntary debit freeze facility. Understanding these regulatory changes is critical for the NISM VA exam because questions frequently test knowledge of current developments.
In Simple Words
The foundational regulations serve as the constitution of the mutual fund industry, while SEBI circulars are the living, evolving amendments that keep the framework current. In the last 5-7 years, the industry has undergone more regulatory changes than in the previous two decades combined — culminating in the complete replacement of the 1996 Regulations with the SEBI (Mutual Funds) Regulations, 2026 (effective April 1, 2026). The most important regulatory developments are as follows. New TER Framework (2026 Regulations): The earlier all-inclusive TER structure has been replaced by a three-component framework — Base Expense Ratio (BER) + Brokerage + Regulatory/Statutory levies. Brokerage caps have been significantly reduced: Cash market from 12bps to 6bps, Derivatives from 5bps to 2bps. The additional 5bps exit load allowance has been removed. Notably, performance-linked expense ratios are now permitted for the first time. Category Expansion: Scheme categories expand from 36 to 40, adding Life-Cycle Funds and Sectoral Debt Funds, while Solution-Oriented Schemes are being discontinued. Portfolio overlap caps of 50% apply for thematic/sectoral funds, with mandatory monthly disclosure of category-wise overlap. Voluntary Debit Freeze: SEBI has introduced a voluntary debit freeze facility for folios (effective April 30, 2026), allowing investors to protect their holdings against unauthorized transactions. Risk-o-meter (2021): Every scheme must display a risk-o-meter showing risk level from "Low" to "Very High" based on actual portfolio holdings, evaluated monthly. Side-pocketing: When a debt instrument faces a credit event (default or downgrade below investment grade), the AMC can segregate it into a separate portfolio, protecting remaining investors. Nomination became mandatory for all new individual folios from October 2023. Pool accounts were prohibited for distributors — client money must go directly from the investor's bank account to the AMC. Digital signatures, e-KYC, and online transactions have been officially recognized. The industry now manages over ₹82 lakh crore in AUM across 27+ crore folios.
Real-Life Scenario
Consider how these regulatory changes affect daily distribution practice. Anita, an MFD in Kolkata, has a client Rajiv who invested ₹20,00,000 in a credit risk fund. One of the bonds in the fund — issued by a real estate company — defaulted, and the AMC invoked side-pocketing. Rajiv's holdings were split into two: the main portfolio (all healthy securities, worth about ₹17,50,000 at the time) and the segregated portfolio (the defaulted bond, book value ₹2,50,000 but market value near zero). Rajiv could freely redeem from the main portfolio, but the segregated units were frozen. The concept functions like a quarantine — the impaired bond is isolated so it does not affect the rest of the portfolio. Two years later, through NCLT proceedings, the company repaid 40 cents on the dollar. Rajiv received approximately ₹1,00,000 from the segregated portfolio — not a full recovery, but significantly better than zero. Meanwhile, his main portfolio had grown to ₹21,00,000. Without side-pocketing, the entire fund NAV would have crashed by 12-15%, triggering panic redemptions and hurting all investors. Under the 2026 Regulations, with the new BER framework and enhanced disclosure requirements, distributors must also understand how the separated expense components (BER + Brokerage + Levies) affect the overall cost to investors, and how the voluntary debit freeze facility can provide additional protection for client folios.
Key Points to Remember
Frequently Asked Questions
Test Your Knowledge
4 questions to check your understanding
Under the SEBI (Mutual Funds) Regulations, 2026, the new expense framework for mutual fund schemes consists of:
Summary Notes
2026 Regulations (effective April 1, 2026): replaces 1996 framework; new TER = BER + Brokerage (Cash 6bps, Derivatives 2bps) + Levies; performance-linked fees now allowed
Categories: 36 → 40 (adds Life-Cycle Funds, Sectoral Debt Funds; discontinues Solution-Oriented Schemes); portfolio overlap caps 50% for thematic/sectoral
Risk-o-meter: 6 levels (Low to Very High), based on actual portfolio holdings, evaluated monthly — dynamic, not static
Side-pocketing: only for credit events (default/downgrade below investment grade), not for market losses — requires trustee approval
Mandatory nomination since October 2023; voluntary debit freeze facility effective April 30, 2026; pool accounts banned; industry AUM ₹82+ lakh crore