SEBI lays down rules for 'active breach' in Specialized Investment Funds; 30-day window to rebalance or redemption

New Delhi, July 29, 2025 — In a key regulatory move aimed at fortifying investor protection and ensuring compliance discipline, the Securities and Exchange Board of India (SEBI) has issued a new set of guidelines for Specialized Investment Funds (SIFs), particularly focusing on the treatment of “active breaches” in fund schemes. The guidelines mandate a 30-day window for fund managers to either rebalance their portfolios or provide investors the option for redemption without exit load.

The move is expected to bring greater transparency and accountability in the alternative investment space, a sector that has grown significantly in recent years with increasing participation from high-net-worth individuals (HNIs) and institutional players.

What Is an “Active Breach”?

According to SEBI’s circular, an “active breach” refers to any willful or conscious deviation from the prescribed investment strategy, mandate, or asset allocation defined in the scheme's private placement memorandum (PPM). This is in contrast to a “passive breach,” which may occur due to market movements or unforeseen factors without any deliberate decision-making.

Active breaches could include intentional overweighting of sectors or securities beyond approved limits, unauthorized investment in instruments not specified in the fund charter, or discretionary deviation from risk thresholds.

Key Guidelines from SEBI

The regulator has set out the following core provisions:

1. 30-Day Rebalancing Window: Fund managers will have a maximum of 30 calendar days from the date of the active breach to bring the portfolio back in line with the stipulated investment strategy.

2. Mandatory Disclosure: Any such breach must be reported immediately to SEBI, along with the reason for deviation, intended corrective action, and expected timeline for rebalancing.

3. Investor Redemption Option: If rebalancing is not completed within 30 days, investors must be offered a one-time redemption window without any exit load or penalty.

4. Fund Manager Accountability: Persistent or repeated breaches may lead to regulatory penalties, disqualification of key personnel, or even winding up of the scheme, depending on severity.

Market Context and Sectoral Impact

The move comes at a time when Alternative Investment Funds (AIFs) and Specialized Investment Funds have seen explosive growth. As of June 2025, the total commitments raised by AIFs crossed ₹11.2 trillion, according to SEBI data, marking a 30% rise year-on-year.

“Given the complexity of structures and investment mandates in SIFs, this framework is essential to curtail any opportunistic behavior by fund managers,” said Meenakshi Desai, Partner at FinEdge Capital. “Transparency is critical, especially when you’re dealing with bespoke portfolios and fewer investor protections compared to traditional mutual funds.”

Analyst Commentary

Market experts have welcomed the move as a progressive step toward structured risk governance.

“SEBI’s guidelines act as a speed bump for reckless deviations in alternative funds. It won’t hurt genuine innovation but will ensure fund managers stay within their risk lanes,”
— Aditya Jain, Head of Portfolio Strategy, Ascent Alternatives.

“The 30-day window is a fair period—it gives managers time to fix the issue or come clean with the investors. The opt-out option adds a safety valve for investor confidence,”
— Ritu Verma, Compliance Lead, NeoInvest Ventures.

Industry Response

While most fund houses have expressed support for the regulations, some have raised concerns over operational flexibility.

A senior executive at a top-tier Category III AIF (on condition of anonymity) remarked, “There are instances where market timing or liquidity issues might delay realignment. A strict 30-day rule could create forced selling, potentially hurting NAVs and, ironically, investors themselves.”

To address such concerns, SEBI has hinted at a possible exception mechanism, to be reviewed on a case-by-case basis, particularly if delays are triggered by market events like circuit filters, macroeconomic disruptions, or illiquid asset classes.

Investor Outlook

From an investor perspective, the framework adds another layer of security and oversight, particularly vital in instruments where regulatory scrutiny has historically been minimal.

This move is expected to make SIFs more attractive for conservative institutional investors such as pension funds and endowments, which prioritize governance frameworks in their investment decisions.

“Institutional investors always look at how deviations are handled. This rule gives us the assurance that any breach will be both disclosed and acted upon,” said Sunil Krishnan, Chief Investment Officer at Heritage Pensions.

Road Ahead

SEBI has directed all fund houses managing Specialized Investment Funds to update their compliance manuals and scheme documents to reflect the new breach management protocol within 90 days. Additionally, fund auditors and trustees are expected to review historical breach data for trends or red flags that may necessitate disclosures or action.

The regulator is also considering a digital dashboard that would allow investors to monitor breach history and compliance reports of funds in real-time, akin to mutual fund fact sheets.

SEBI’s latest framework for addressing active breaches in Specialized Investment Funds is a strong signal that India’s regulatory architecture is evolving to match the sophistication of its capital markets. By balancing the twin objectives of investor protection and operational flexibility, the regulator continues to build trust in high-risk, high-reward asset classes.

As the alternative investment landscape matures, such compliance measures are expected not only to ensure accountability but also to drive better governance standards and investor participation in the long run.