SEBI Board Meeting: New Mutual Funds Lite Framework Introduced For Passively Managed Schemes

The Securities and Exchange Board of India, in its board meeting on Monday, has introduced a new mutual fund framework for passively managed schemes. The 'MF Lite Framework' will enable a relaxed framework with light-touch regulations.

The newly launched framework by SEBI intends to promote ease of entry, encourage new players, reduce compliance requirements, and increase penetration, according to a circular released by the regulator. It will also enhance market liquidity, facilitate investment diversification, and foster innovation.

The light touch regulations in the new framework include relaxed requirements related to eligibility criteria for sponsors, responsibility of trustees, approval process, and disclosures.

The new framework by SEBI will also enable existing asset management companies that have active and passive schemes to hive off respective passive schemes. The AMCs can give these schemes to a different group entity, thereby resulting in the management of active and passive schemes by different operators under the same banner.

If the AMCs decide to keep the passively managed schemes within the current asset management companies under the existing MF Regulations, the relaxed disclosure and regulatory requirements for index-based passive schemes under the MF Lite framework will also apply to them.

The current regulatory framework encompasses both active and passive mutual funds schemes, such as exchange-traded funds and index funds. However, the regulations are primarily designed with active schemes in mind, focussing on the associated risks and complexities.

Passive funds, on the other hand, have a rule-based investment strategy, allowing little discretion for AMCs in terms of asset allocation and investment objectives. Consequently, many provisions of the existing regulations may not apply to passively managed schemes. The board, in order to address this issue, introduced the MF Lite Framework.