SEBI suggests easing rules 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 risks associated with the supervision of passively managed investment funds, the proposed “MF Lite” regulation aims to ease compliance requirements, stimulate innovation, increase competition and facilitate market entry for investment funds wishing to launch purely passive schemes, the market regulator said in its consultation paper.

Passively managed mutual fund schemes mirror an underlying index, such as ETFs and index funds, making it easier to track their portfolios. On the other hand, active fund schemes require skilled fund managers to set investment strategies and select securities.

However, the current regulatory framework for investment funds is uniformly applied to all investment fund schemes and does not differentiate in terms of the applicability of rules on barriers to entry – net worth, track record, profitability – and other compliance requirements for entities that may wish to launch only passive funds. Hence, various provisions of the existing regulatory framework may not be relevant for passively managed schemes, a relaxed framework with light regulations has been proposed as MF Lite Regulations for passive mutual fund schemes.

As per the proposed framework, MFs wishing to manage only passive schemes (such as listed funds and index funds) should be covered by the MF Lite provisions. However, there may be existing mutual funds that may choose to manage both active and passive schemes under their existing registration. Therefore, in order to ensure uniform applicability of the proposed relaxations and ensure a level playing field for all passive schemes of MFs, this consultation paper adopts a two-pronged approach.

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

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

A minimum net worth of Rs 350 million for AMC companies should be relevant under the main eligibility track, five years of financial experience may not be relevant under the main eligibility track of MF Lite regulations.

In terms of an alternative eligibility route where the sponsor’s profitability and sound track record need not be taken into account, SEBI has suggested that the minimum net worth of a mutual fund management company should be Rs 750 million and the lock-in period for the sponsor’s minimum shareholding should be three years to ensure the entry of serious players into the market under the MF Lite system.

The regulator has also proposed roles and responsibilities of the trustee and the board of the AMC in the proposed MF Lite rules.

(Based on input from PTI.)