Why Restrict When You Can Regulate mutual funds?

I have a piece in today's Financial Express, with Navneeta Shankar and Pragya Garg on SEBI's welcome (though informal) announcement to review the scope of what a mutual fund can do - outside of mutual funding :) This will be a reform which has to be carried across all financial intermediaries, specially in areas which do not introduce capital risk - and regulators needs to liberalise across silos of regulators - for example there is wealth management which involves financial products across deposits, securities, gold, insurance and pension. 

At the recent CII Mutual Fund Summit, SEBI Executive Director Mr. Manoj Kumar catalyzed industry optimism by signaling a potential relook at Regulation 24(b) of the SEBI (Mutual Funds) Regulations, 1996. The provision, long seen as a constraint, prohibits asset management companies or AMCs from undertaking fund management activities beyond mutual funds, except through SEBI-approved subsidiaries. It also mandates separate teams for fund management—even for back-office functions. Even some distinction between broad based funds and non-broad based should be done away with so long as it is clean money.

While originally rooted in investor protection and systemic prudence, these restrictions may be misaligned with today’s integrated financial ecosystem. As India’s mutual fund industry surpasses ₹64 lakh crore in assets under management (AUM), it is time to ask whether such constraints are serving or stifling investor interests and innovation.

One of the most glaring missed opportunities is the management of foreign investments. Indian AMCs—despite their competence—are largely excluded from managing India-focused offshore funds, which are instead run from jurisdictions like Singapore or the UAE. The core asset management expertise of Indian fund houses remains underutilized, costing the domestic industry potential leadership in global India-focused capital management. While there are significant tax considerations at play, this piece focuses on the regulatory bottlenecks.

Regulation 24(b) has come to represent the Achilles’ heel of India’s mutual fund ecosystem. Introduced at a time when the primary fear was that AMCs could drift into unrelated businesses, potentially diluting fiduciary obligations, the regulation took a blanket prohibition approach. However, global markets have since matured. Today, asset managers like BlackRock, Vanguard, and Allianz operate across wealth management, advisory, private credit, and fintech—without compromising investor protection—thanks to robust internal governance and transparent disclosures.

In contrast, Indian AMCs are required to establish separate subsidiaries even for closely related businesses. This creates inefficiencies, increases costs, and limits scale—all of which ultimately affect the end investor. Worse, it prevents Indian AMCs from competing globally on equal footing.

The regulatory philosophy must shift. Regulation should be about managing and disclosing conflicts of interest, not banning economic activity. A prohibition-based model, while perhaps necessary in nascent markets, is out of step with today’s sophisticated financial landscape. Conflicts of interest exist across professions—from legal to audit to fund management—and are rarely grounds for outright prohibition. Instead, they are managed through disclosure, transparency, and strong compliance mechanisms.

The United States and European Union offer useful examples. In both regions, mutual fund managers are permitted to diversify their services—provided they ensure client asset segregation, implement robust controls, and disclose conflicts clearly. Regulation in these jurisdictions is designed to build guardrails, not walls. India must consider a similar evolution.

A central reform principle could be client-level segregation. Rather than enforcing structural separation between fund management and ancillary activities, regulators should require operational ring-fencing—through Chinese walls, access control, compliance oversight, and independent audit mechanisms. This is already standard practice in India’s securities broking framework under the Securities Contracts (Regulation) Rules, 1957, and forms the backbone of the Financial Conduct Authority’s (FCA) Client Assets Sourcebook (CASS) in the UK. These frameworks insulate investor assets from systemic contagion without sacrificing operational efficiency.

SEBI itself has evolved in other areas. Merchant bankers, initially restricted to capital market activities, have been allowed to expand into corporate advisory and venture capital, subject to conditions like capital adequacy and periodic disclosures. Similarly, stockbrokers can undertake services such as depository operations and portfolio advisory without the need to float separate legal entities. The key requirement is maintaining client asset segregation and passing periodic audits—not artificial structural divisions.

There have also been course corrections. SEBI’s recent reversal of a proposal to segregate listed and unlisted business lines for merchant bankers is a recognition that structural separation does not always serve investor interest. Another example was SEBI’s earlier misinterpretation of a Central Government rule which allowed brokers to carry out any agency-based securities business without financial liability. It took a government affidavit in court to correct this error. These episodes underscore the need for regulatory restraint and an openness to recalibration.

Relaxing Regulation 24(b) does not mean loosening oversight. On the contrary, it provides SEBI an opportunity to align AMC governance with the broader regulatory ecosystem—through net worth thresholds, enhanced disclosure norms, operational firewalls, and strengthened compliance. This would allow AMCs to scale intelligently, without compromising investor protection.

More importantly, this reform would position Indian AMCs as global players. With a supportive framework, they could manage not just domestic mutual funds, but also cross-border mandates, alternative investment funds (AIFs), wealth management platforms, and fintech-driven models. However, global competitiveness requires more than just permission—it demands cutting-edge infrastructure. Platforms like BlackRock’s Aladdin, which integrates risk, portfolio, and compliance functions, are examples of how technology can amplify scale while enhancing oversight.

India’s mutual fund industry must similarly invest in technological innovation to compete at the global level. SEBI’s role would be to ensure that regulations remain principle-based, technology-neutral, and aligned with global best practices—so that domestic capital is not disadvantaged. There is also a case for simplifying mutual fund rules and master circular which together exceed a thousand pages of law.

Finally, this is not just about mutual funds. India’s financial regulatory architecture remains highly fragmented, with sector-specific silos across insurance, asset management, securities, and fintech. The future lies in cross-functional financial institutions—firms that operate seamlessly across product verticals while respecting domain-level risk protocols. A tiered risk approach can allow regulated entities to offer services across securities, insurance, and non-banking domains, while applying stricter guardrails in areas that fall outside existing regulatory oversight. The current siloed model impedes innovation and stunts the growth of integrated platforms. Enabling regulated entities to expand responsibly—based on risk tiering, disclosures, and capital adequacy—would help India leapfrog into a more efficient, investor-friendly financial system.

In conclusion, revisiting Regulation 24(b) is not just a legal reform—it’s a strategic pivot. It’s about modernizing India’s mutual fund industry, unlocking dormant capabilities, and ensuring that Indian asset managers can finally claim their place in the global sun. A principles-based, risk-managed framework—backed by technology and investor transparency—can make that possible.