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Market regulator Sebi proposes easier regulation for passive AMCs | Market News

Posted on by darion

Currently, MFs are not allowed to launch passive hybrid funds and only open-ended structured target-maturity funds are allowed

Sebi
Sebi | Photo: Bloomberg

Abhishek Kumar Bombay

The Securities and Exchange Board of India (Sebi) has proposed to introduce a lighter version of mutual fund (MF) rules for “passive only” fund houses.

Existing asset management companies (AMCs) that offer both active and passive funds will also have the option to spin off their passive businesses into a separate entity under the new MF Lite regulations.

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“Given the lower risks inherent in managing passively managed MF programs, the proposed MF Lite Regulations aim to reduce compliance requirements, support innovation, encourage competition and promote ease of entry to the market for MFs interested in running exclusively passive programs,” he said Sebi.

Moreover, the regulator is also planning to introduce new categories in the passive space, according to a consultation document released by Sebi on Monday.

If the proposals are passed, fund houses will be able to launch exchange-traded funds (ETFs) and index funds in the hybrid space. The regulator has also considered introducing closed-end target maturity funds.

Currently, mutual funds are not allowed to launch passive hybrid funds and target maturity funds are only allowed in an open-ended structure.

Rule relaxations under MF Lite range from lower net worth and profitability criteria for sponsors and AMCs to reduced reporting requirements.

Under MF Lite, for a company to qualify as a sponsor as per the main eligibility criteria, it should have generated a profit of at least Rs 5 crore in the last three out of five years. As per the existing rules, a profit of at least Rs 10 crore in each of the previous five years is required.

For AMCs, the minimum net worth requirement is to be Rs 35 crore, up from Rs 50 crore in the current rules. An AMC can reduce its net worth to Rs 25 crore after achieving profitability for five consecutive years.

If the sponsor chooses the alternative eligibility route, it will have to maintain at least Rs 75 crore net AMC value.

Firms managing purely passive portfolios will also be free to conduct up to 10 per cent of their trades through affiliated brokers, up from 5 per cent under current rules.

The minimum combined experience required for CEO, COO, CIO and CIO in passive-only AMCs will also be lower at 20 years compared to the current 30 years.