Mahak Yadav and Nikhil Ranjan
Introduction
In its quest for modernising the mutual fund market, the Board of the Securities Exchange Board of India (“SEBI”) has notified the SEBI (Mutual Funds) Regulations, 2026, which replaces the existing SEBI (Mutual Funds) Regulations, 1996, which has been the guiding force for the mutual fund market in the country for the last three decades. The new regulations are the product of a structured consultative process, anchored by the consultation paper released in October 2025, which candidly acknowledged that the 1996 framework had not kept pace with an industry that had grown from a marginal savings instrument into one of the largest segments of India’s capital markets.
This post argues that the 2026 Regulations represent a genuine structural advance in the form of a bifurcated sponsor eligibility framework, prudential investment limits, and a more transparent fee architecture. However, their ultimate value will depend on how SEBI exercises the broad delegated powers that the new framework grants. The shift from rule-based specificity to principles-based flexibility enables agile regulation but also increases regulatory uncertainty and creates new risks of arbitrary or inconsistent enforcement that the 1996 framework, for all its rigidity, did not.
This post examines the key structural changes introduced by the 2026 Regulations across sponsor eligibility, investment limits, fee architecture, governance, and disclosure, while also evaluating whether each reform delivers on its stated objectives and what trade-offs it involves.
The Evolution of Indian Mutual Fund Governance from the 1996 Regime to the 2026 Modernised Framework
The promulgation of the Securities and Exchange Board of India (Mutual Funds) Regulations, 2026 in January 2026 heralds a watershed moment in the investment regulatory space in India. This marks a move away from the earlier structure, which has been the benchmark since 1996. The sections below examine each of the principal reform areas in turn.
That said, it is worth noting at the outset that while the 2026 Regulations represent a significant departure from the 1996 framework in terms of structure and approach, much of the substantive norm-setting has been delegated to SEBI circulars rather than being codified in the regulations themselves. This means that the regulatory architecture, while flexible and responsive, may not always provide the degree of legal certainty that fund managers and investors require. The effectiveness of the 2026 Regulations will therefore depend significantly on how consistently and transparently SEBI exercises this delegated norm-setting power going forward.
A Bifurcated Approach to Sponsor Eligibility and Registration Pathways
The entry requirements for aspiring mutual fund sponsors have also reflected SEBI’s intent to ensure that the growth of the industry is balanced with financial stability. Traditionally, the eligibility criteria were based on a strong track record and a general reputation for fairness, which meant that a sponsor had to have a five-year track record of profitability and financial services experience. The net worth for an Asset Management Company (AMC) was also initially set at ₹10 crores, which was later increased to ₹50 crores in 2014. However, in 2021, an alternate route was also introduced for aspiring sponsors who did not have a traditional track record, which was further fine-tuned in 2023. This has now formally come into being with the 2026 Regulations, which have clearly laid down two separate and clear-cut eligibility criteria for aspiring sponsors in Regulation 5. The first route is similar to the traditional track record route, which requires that the sponsor be assessed based on experience, net worth, and profitability criteria, along with a continuous AMC net worth of ₹50 crores. It also requires that key officers such as the CEO and CIO be appointed, with a minimum of three years of experience each.
On the other hand, the second route acts as a capital route for the sponsors, who may not be able to qualify on other parameters, with a significantly higher requirement of a minimum net worth of ₹150 crores for the AMC on a continuous basis. A notable requirement for the second route is that out of the above-mentioned amount, ₹100 crores must be invested in assets that are notified by SEBI. Moreover, though key officers are expected to have a minimum of three years of experience, the management team must have a combined experience of 30 years for this route. In order to achieve parity, a transition route for the second route is also provided, where the requirement of a minimum net worth can be relaxed to ₹50 crores in case the AMC records profits for five consecutive years. A much-needed provision for the surrender of a registration certificate issued under Regulation 8 has also been included in the 2026 Regulations, which were previously governed by general powers rather than express provisions. This ensures that once all the schemes are wound up, the mutual fund has a clear exit route, which protects the interests of the investors during the process of winding up the schemes. However, the capital route’s very high entry bar of ₹150 crores also raises a concern about regulatory intent. Though it is designed as an inclusive pathway for non-traditional sponsors, the scale of capital required may in practice favour large financial conglomerates. This could potentially crowd out genuinely novel entrants and entrench incumbent market structures rather than diversifying them.
The Transition from Hard-Coded Investment Caps to Prudential Limits
A major part of this overhaul is the investment restrictions applicable to mutual fund schemes. The earlier regime of 1996 was based on rigid numerical limits, such as Clause 10, which restricts investment of more than 10% of Net Asset Value (NAV) in equity shares of any single company. The new regime of 2026 Regulations is based on a more flexible framework of prudential limits, whereby specific limits of concentration are not prescribed under the main regulation but are subject to norms prescribed by SEBI from time to time. This is viewed as a neutral or tightening measure, as it would enable SEBI to prescribe norms for the concentration of investment for different categories of issuers based on their risk assessments. The critical question, however, is whether this delegation of norm-setting power to SEBI circulars provides sufficient legal certainty for fund managers and investors. Subordinate regulation is easier to change without parliamentary scrutiny, and the absence of hard statutory limits means that investors’ exposure parameters could shift with comparatively little notice or public consultation.
In addition, the specification of the types of listed securities and the specification of the types of money market instruments that can be invested have been made under the 2026 Regulations, Clause 1 of the sixth schedule. The specification is much clearer as opposed to the investment rules. With regard to the specification of the types of debt and money market instruments, the 1996 regime commenced with a regime whereby the investment could be made up to 10% NAV in rated debt, which was heavily restricted with regard to unlisted debt. The new model promises to deliver a more sophisticated risk-based approach from the outset. This is clearly seen in the way it addresses the distinction between the concepts of ‘unlisted Non-Convertible Debts’ and ‘unlisted Government Securities’ through the sub-delegation of the applicability of caps in the rule-making process itself. The 2026 model would be more effective with regard to the situations of ‘credit stress’ and ‘liquidity events’ in a manner that would facilitate ‘product innovation.’
Updating Borrowing Powers and Specialised Asset Frameworks
The 2026 Regulations continue the fundamental prudential principle of mutual fund borrowing being permitted only to meet temporary redemption or payout needs and not being permitted to exceed 20% of net assets for more than six months. However, Regulation 42 makes a vital modernisation by clarifying that the 20% limit does not apply to intraday borrowing. This acknowledges the current-day requirements of Exchange Traded Funds (ETFs) and large funds within a high-frequency settlement environment and offers a nuanced relaxation of the rules to enhance operational efficiency without compromising the fundamental prohibition on leverage. In addition, the handling of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) has seen a major update. Although the 1996 Regulations were updated in 2017 to include these assets at capped levels, the 2026 Regulations now clearly categorise REITs as equity-related assets. As a part of the broader trend of the new framework, the “percentage caps” approach of the main regulations is replaced by a “prudential limit” approach, where SEBI prescribes “exposure norms.”
This change indicates an understanding that for asset allocation considerations, REITs are seen to be closer to equity than traditional debt instruments and still allows for guardrails to be set on a category-specific basis. Another area where changes have been made to simplify and streamline regulations is with respect to commodity derivatives. Instead of having separate provisions for commodity-linked schemes, they are now included under a broad framework of derivatives under the Sixth Schedule. Additionally, there are enabling provisions for Gold and Silver ETFs under the 2026 Regulations. This inclusion of commodity derivatives under a broad framework appears to be an effort to harmonise the regulations for all derivative instruments and to ensure that commodity risk is still tightly managed under SEBI guidelines for exposure limits and margins.
A Structural Redesign of the Fee and Expense Architecture
Perhaps the most impactful structural change for investors is the complete overhaul of the fee and expense model. The 1996 Regulations used a Total Expense Ratio (TER), which served as a bundled cap for management fees, operating costs, and transaction costs. The 2026 Regulations, on the other hand, are moving towards an unbundled fee and expense model based on the Base Expense Ratio (BER). In this new model, the BER will only include the AMC’s own management costs and operating costs, whereas brokerage, transaction costs, and statutory taxes such as GST will be included as separate components, charged on an actual basis. This will help improve transparency and comparability, as well as avoid any potential cross-subsidisation of costs that was possible in a bundled TER model. It will also help keep costs in check by tightening the limits for the BER, even as any legitimate statutory costs are passed through transparently.
On the flip side, SEBI as a whole has reduced the basic expense ratios, which would be applicable to all categories. For example, the BER, which would be applicable to Index Funds and ETFs, would be reduced to 0.90%. In addition, the expense ratio, which would be applicable to close-ended equity schemes, would be reduced to 1.00%. This is so because SEBI as a whole is keen on promoting the concept of ‘Economies of Scale’ resulting from the growth in the ‘Assets Under Management’ as a whole. Furthermore, the ‘additional expense’ headroom of 0.05%, which was permitted under the 1996 Regime with regard to certain categories of schemes, has been removed. This removal of the ‘additional headroom’ perhaps implies that the growth of the industry as a whole has been so strong that there is no need to pay the ‘additional expense’ in respect of ‘distribution-related’ expenses. Perhaps the most important conceptual change in the 2026 Regulations is the concept of the ‘optional performance-linked fee model.’ This would enable a reward to be paid to the AMCs for the actual alpha generation, as long as this model is symmetric, i.e., a penalty for the underperformance in terms of reduced fees is applied. This would make the incentives of the AMC more aligned with those of the investor rather than the assets gathered. However, the BER framework also carries a structural concern. By disaggregating expenses and passing transaction costs through on an actual basis, the new model may create incentives for AMCs to increase portfolio turnover or generate higher brokerage, since these costs are borne by the scheme rather than absorbed into a capped total. The effectiveness of this reform will therefore depend on whether SEBI’s monitoring of actual cost components is robust enough to prevent expense manipulation in a disaggregated format.
However, it must be noted that the unbundling of costs under the BER, while a genuine step towards transparency, does not in itself guarantee better outcomes for investors. Transparency and investor benefit are not the same thing. Most retail investors may not have the financial literacy to understand disaggregated cost components. Moreover, the risk that AMCs exploit the pass-through of actual transaction costs by increasing portfolio churn or relabelling expenses is a real one. The regulations do not establish a monitoring mechanism to prevent this, which leaves a significant gap between disclosure and investor protection.
Strengthening Investor Protection through Cost Management and Governance
Further clarity is offered by the 2026 Regulations regarding exit charges and New Fund Offer (NFO) costs. In the context of the 1996 regime, exit charges were indirectly capped through a pricing spread. The 2026 Regulations now clearly specify a hard cap of 3% of the NAV for exit charges of open-ended schemes. What is more important is Regulation 44(3), which clearly states that the entire exit load must go to the scheme and cannot be utilised by the AMC. In this context, investors who stay must be compensated by those investors who exit. Regarding NFOs, Regulation 66(3) clearly states that all expenses pertaining to the NFO up to the date of allotment must be borne by the AMC, trustee, or sponsor. This removes the practice of charging NFO costs to the scheme, which was prevalent till now. This ensures a higher degree of fairness between investors and removes a source of return drag.
Operational governance and communication have also seen a similar modernisation. Requirements in respect of trustee meetings have also been rebalanced, wherein the frequency of the meetings is required only on a quarterly basis rather than every two months. Even though the frequency of the meeting is less, the requirements in respect of quorum have also tightened considerably, wherein at least 50% of the trustees need to be present, as opposed to the requirement of merely having one independent trustee being present. As far as marketing is concerned, the requirement of filing hard copies of all the advertisements with SEBI has been removed, whereas preferring a risk model and inspections, the funds need to comply with the Advertisement Code. This will ease the day-to-day compliance burden while maintaining high standards for fairness and non-misleading presentation.
However, these governance reforms also have structural implications for the mutual fund industry as a whole. Compressed expense limits will disproportionately affect smaller AMCs, potentially accelerating consolidation and entrenching the dominance of well-capitalised players, which is an outcome that contradicts the competitive market that the regulations seek to promote. Moreover, while the increased trustee quorum requirement is a formal improvement, it does not resolve the fundamental problem that trustees remain informationally dependent on the very AMCs they are supposed to oversee. Formal independence without informational independence remains a weak safeguard.
Transitioning to Technology Neutral Disclosures and Institutional Protections
The 2026 model also moves away from physical letters and newspaper advertisements to a technology-neutral and digital-disclosure-based model. The regulation of financial disclosures for schemes is now handled by digital platforms and AMC websites under Regulation 70. This reduces costs for schemes and makes disclosures more accessible to investors. This is in line with the increased availability of digital models of distribution and servicing in the new economy. However, there are still provisions for communication and exit options in the event of a change in scheme fundamentals.
Finally, there is also a regulatory framework for addressing institutional requirements, especially for those investing in Alternative Investment Funds (AIFs). A SEBI circular issued in 2023 permits AIFs to excuse or exclude investors like insurance companies from participating in particular investments if participation by these investors would be against relevant laws. This is an important provision for insurance companies that need to adhere to the Insurance Act of 1938, under which they cannot invest overseas. By entering into an agreement with the AIF to excuse these investors from investing in overseas ventures, this regulatory framework ensures that institutional investors get to be part of sophisticated financial instruments without breaching relevant laws. All these various updates to the 2026 Regulations demonstrate a comprehensive attempt to ensure a more transparent and efficient system for the future of Indian finance.
However, this move towards digital disclosure may not be equally beneficial for all investors. Retail investors who are less digitally literate may find it more difficult to access and understand disclosures that are published only on digital platforms and AMC websites. The 2026 Regulations do not lay down a baseline standard for accessibility or comprehension in this regard, which raises the concern that the shift from physical to digital communication may reduce meaningful disclosure for a segment of investors rather than improve it.
Conclusion
The SEBI (Mutual Funds) Regulations, 2026 mark a meaningful structural advancement in India’s investment regulatory landscape. The bifurcated sponsor eligibility framework, the transition from hard-coded investment caps to prudential limits, and the shift from the TER to the BER each reflect a coherent regulatory philosophy of moving from rigidity to adaptability, from opacity to transparency, and from prescriptive compliance to principles-based governance. These are genuine improvements over the 1996 framework, and their potential to enhance investor protection and operational efficiency should not be understated.
At the same time, some challenges remain to be addressed, especially with respect to trustee oversight, managing conflicts of interest, and protecting retail investors from information asymmetry risks in a digital-first disclosure regime. The success of the 2026 Regulations will depend on SEBI’s ability to implement these changes effectively and strike a delicate balance between flexibility and clarity. With a new framework that promotes a culture of innovation, cost efficiency, and long-term sustainability, the new regime has the scope to boost investors’ confidence in India’s mutual fund industry while also supporting its growth and development.
Mahak Yadav and Nikhil Ranjan are third-year students at National Law Institute University (NLIU), Bhopal.
NUALS Law Journal 