Scheme merger and conversion rules

SEBI’s scheme merger and conversion framework governs when and how AMCs can merge two existing schemes or convert a scheme from one category to another. The framework was particularly relevant during the implementation of the SEBI October 2017 categorisation , when AMCs had to consolidate overlapping schemes across the new category boundaries.

For Indian retail investors who hold units in a scheme being merged or converted, understanding the framework clarifies what to expect:

• Notification of the merger/conversion.
• Right to redeem without exit load during the notification window.
• Tax implications of the deemed transfer.
• New scheme features post-merger.

Regulatory framework

SEBI requirements

Per SEBI (Mutual Funds) Regulations 1996 :

• Material change: Mergers and conversions are material changes to scheme.
• Unitholder approval: 75% of unit value must consent (or vote against).
• Trustee approval: Trustee company must approve.
• SEBI approval: SEBI prior approval required.
• Notification window: Investors notified at least 30 days before effective date.
• Exit-load-free redemption: Investors can redeem without exit load during the notification window.

Scheme merger

When two schemes merge:

• Smaller / less-viable scheme absorbed into larger.
• Common reasons: scheme below viable AUM, category overlap, AMC strategic decisions.
• Investor units transitioned proportionally to new scheme.

Scheme conversion

When a scheme converts from one category to another:

• Common reasons: re-categorisation per SEBI rules, scheme strategy update.
• Asset allocation must align with new category post-conversion.
• The conversion is operationally similar to merger but within the same AMC.

October 2017 categorisation impact

The SEBI October 2017 categorisation circular required AMCs to:

• Eliminate overlapping schemes across new categories.
• Consolidate sub-scale schemes.
• Re-categorise schemes that didn’t fit the new framework.

This triggered widespread merger and conversion activity over 2017-2018.

Operational mechanics

Notification

• AMC publishes addendum to SID.
• Notifies unit holders via email + postal.
• Provides detailed merger / conversion terms.
• 30-day window for investor consent / exit.

Exit-load-free redemption

• During the 30-day window, investors can redeem without exit load.
• Capital gain / loss tax still applies (per switch as taxable event ).

Effective date

• On the effective date, units in the source scheme converted to units in the destination scheme.
• Conversion ratio: source NAV / destination NAV.
• Unit holders receive new unit certificates / SOAs.

Tax implications

The merger / conversion is treated similarly to a switch as a taxable event :

• Deemed redemption of source-scheme units.
• Deemed subscription to destination-scheme units.
• Capital gain / loss computed.
• Tax payable per holding period and category.

For long-term holders, the deemed transfer can trigger material tax liability if the original purchase was years ago at lower NAV.

Investor rights

During the notification window:

• Right to redeem without exit load.
• Right to obtain information about the merger / conversion details.
• Right to vote: 75% threshold typically not reached unless small dissent; effectively investor consent is implicit if they don’t actively redeem.

See also

• Mutual funds in India
• SEBI October 2017 categorisation
• Multi-cap reclassification (2020)
• Nippon Reliance acquisition (2019)
• HSBC L&T acquisition (2022)
• Bandhan IDFC acquisition (2022)
• Sundaram Principal acquisition (2021)
• Switch as a taxable event
• NFO addendum
• Mutual fund exit load
• SEBI (Mutual Funds) Regulations 1996
• Trust structure (sponsor, trustee, AMC, custodian)
• SEBI half-yearly trustee report
• SEBI
• AMFI

External references

• SEBI
• AMFI India

References

1. SEBI (Mutual Funds) Regulations 1996.
2. SEBI master circular on scheme mergers and conversions.
3. AMFI Best Practice Guidelines.