SEBI Suggests Relaxed Regulations For Passively Managed Mutual Funds

The Securities and Exchange Board of India on Monday suggested a more lenient regulatory framework for passively managed mutual fund schemes to ease compliance requirements.

Given the lower risk involved in overseeing passively managed mutual fund schemes, the proposed 'MF Lite' aims to lessen compliance requirements, stimulate innovation, boost competition, and facilitate easier entry for mutual funds that wish to launch only passive schemes, the markets regulator said in its consultation paper.

Passively managed mutual fund schemes mirror an underlying index like ETFs and index funds, making it easy to track their portfolios. Active fund schemes, on the other hand, need skilled fund managers to establish investment strategies and choose securities.

The present regulatory framework for MFs is, however, uniformly applicable for all MF schemes and does not differentiate regarding the applicability of provisions relating to entry barriers—net worth, track record, profitability—and other compliance requirements for entities who may be desirous of launching only passive funds. Accordingly, various provisions of the existing regulatory framework may not be relevant for passively managed schemes, a relaxed framework with light-touch regulations has been proposed as MF Lite Regulations for passive MF schemes.

Under the proposed framework, MFs desirous of managing only passive schemes (such as Exchange-Traded Funds and Index funds) should be covered under the MF Lite Regulations. However, there may be mutual funds existing as on date, who may opt for management of both active and passive schemes under their existing registration. Hence, to ensure uniform applicability of proposed relaxations and to provide a level-playing field across all passive MF schemes, a two-pronged approach has been adopted in this consultation paper.

SEBI has proposed for ease of entry and relaxed provisions for MFs intending to launch only passive schemes under MF Lite registration, and ease of compliance, relaxed disclosures and other regulatory requirements for passive schemes under existing MFs as well as schemes that may be launched under the MF Lite registration. SEBI has sought public comments till July 22 on the proposals.

In its consultation paper, the regulator has proposed the eligibility requirements for sponsors and AMCs under the main as well as alternative eligibility route, in the proposed MF Lite framework.

A minimum net worth of Rs 35 crore for AMCs should be appropriate under the main eligibility route, financial experience of five years may not be relevant under the main eligibility route of MF Lite Regulations.

With regards to the alternative eligibility route wherein the sponsor’s profitability and sound track record are not required to be considered, SEBI has suggested a minimum net worth of Rs 75 crore for an AMC and a lock-in period of three years of minimum shareholding of the sponsor should be mandated so as to ensure entry of serious players under the MF Lite regime.

The regulator has also proposed for roles and responsibilities of a trustee as well as the board of AMCs in the proposed MF Lite rules.

(With inputs from PTI.)