SEBI scheme merger and conversion rules (India)

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SEBI scheme merger and conversion rules in India govern the process by which two or more existing mutual fund schemes are amalgamated into a single surviving scheme (merger), or a scheme is converted from one type or category to another (conversion). These rules are embedded in Regulation 18(15A) and Regulation 18(15B) of the SEBI (Mutual Funds) Regulations, 1996, and elaborated through SEBI’s Master Circular. All scheme mergers require SEBI’s prior approval and a mandatory exit window for unitholders; the framework was heavily used during the SEBI scheme rationalisation circular 2017 compliance wave and the SEBI multi-cap reclassification 2020 exercise. These rules are administered by the SEBI Investment Management Department.

Types of restructuring

Scheme merger

A merger involves the amalgamation of two or more schemes of the same mutual fund or of different mutual funds. Post-merger:

  • Only the “surviving scheme” remains operational.
  • Investors in the “merging schemes” receive units of the surviving scheme at the ratio of the respective NAVs on the merger date.

Scheme conversion

A conversion changes the fundamental nature of a scheme (e.g., from close-ended to open-ended, or from one category to another). This is treated as a change in fundamental attributes under Regulation 18(15A).

Fundamental attribute change

Any change to a scheme’s:

  • Investment objective
  • Type or category
  • Asset allocation bands (minimum or maximum limits)
  • Benchmark
  • Load structure (to investor detriment)

…constitutes a “fundamental attribute change” and triggers the regulatory process for scheme merger or conversion.

Regulatory process

Step 1, Trustee approval

The trustee must approve the proposed merger or conversion and confirm it is in the best interests of unitholders.

Step 2, SEBI application

The AMC files an application with the IMD (Investment Management Department) disclosing:

  • Names and scheme codes of all merging schemes.
  • Rationale and justification.
  • Proposed surviving scheme and its post-merger investment mandate.
  • Financial impact analysis (TER, fund size, fund manager assignments).
  • Copy of the draft post-merger SID.

Step 3, SEBI scrutiny

The IMD reviews the application for:

  • Category compliance (the surviving scheme must fit into one permitted category under the 2017 framework).
  • TER compliance (post-merger TER must be within permissible slabs).
  • Absence of regulatory violations in the merging schemes.

SEBI may seek additional information and issue conditions. SEBI’s prior written consent is mandatory before any communication to investors or any market activity.

Step 4, Exit window notification to investors

Upon SEBI’s written consent:

  • The AMC must notify all unitholders of the merging scheme(s) in writing (email and/or physical letter) at least 30 calendar days before the merger effective date.
  • Notification must disclose: reason for merger, NAV methodology on merger date, and the exit window (typically 30 days from the notification date) during which investors may redeem at NAV without exit load.
  • The AMC must publish a newspaper advertisement in at least two national dailies.
  • The draft post-merger SID must be available on the AMC website during the exit window period.

Step 5, Exit window

During the 30-day exit window:

  • Investors in the merging scheme(s) may redeem without exit load.
  • No exit load may be charged; the waiver is mandatory per Regulation 18(15A).
  • New subscriptions into the merging scheme during the exit window continue normally.

Step 6, Merger execution

On the merger effective date:

  • The NAV of the merging scheme and the surviving scheme are fixed as of the close of business on the last day.
  • Units of the merging scheme are exchanged for units of the surviving scheme at the ratio of the two NAVs.
  • The merging scheme ceases to exist; its ISIN is closed.
  • Investors’ account statements are updated by the registrar (CAMS/KFintech) within 5 business days.

Step 7, Post-merger obligations

  • Updated SID and SAI for the surviving scheme uploaded within 30 days.
  • AMFI data portal updated.
  • Historical performance records of the merging scheme archived.
  • If the merger involved a close-ended scheme, stock exchange listing is suspended and units are cancelled.

Handling of tax implications

The exchange of units from a merging scheme to the surviving scheme is a taxable event in the hands of the investor:

  • The exchange is treated as a redemption of units in the merging scheme and a fresh subscription in the surviving scheme.
  • Capital gains tax applies on the merger date based on the redemption value (NAV of the merging scheme).
  • The holding period for the new units in the surviving scheme restarts from the merger date.

SEBI’s post-merger notification to investors must include a clear statement of the tax implication, consistent with the disclosure requirements in the SID.

Mergers in the context of the 2017 rationalisation

The 2017 rationalisation wave triggered the largest set of scheme mergers in Indian mutual fund history. Between October 2017 and May 2018, approximately 200–300 open-ended schemes were merged across AMCs:

  • Most large AMCs had 2–4 large-cap or diversified equity funds that needed to be merged into a single large-cap or multi-cap fund.
  • Several AMCs had multiple medium-duration and corporate bond funds that were merged.
  • The process generated significant temporary redemptions during the exit windows.

Mergers involving different mutual funds (cross-AMC merger)

Regulation 41 of the 1996 Regulations permits mergers across different mutual funds (i.e., between schemes of AMC A and AMC B). Such cross-AMC mergers require:

  • Consent of both trustee companies.
  • Separate SEBI approval.
  • Combined exit windows for both sets of unitholders.

Cross-AMC mergers are rare but have occurred during distressed AMC situations (e.g., Reliance Mutual Fund’s acquisition by Nippon India in 2019 was preceded by scheme alignment processes).

See also

References

  1. SEBI (Mutual Funds) Regulations, 1996, Regulations 18(15A), 18(15B), 41.
  2. SEBI Master Circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
  3. SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017.
  4. AMFI, “Merger guidelines for mutual fund schemes”, amfiindia.com.

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The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

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