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SEBI has issued a consultation paper in which it proposes introduction of new regulations called MF Lite, which will help existing fund houses offering passive funds to reduce compliance burden and facilitate easy entry of new players who want to offer passive funds.
In the consultation paper, SEBI said, “The objective of this consultation paper is to seek comments / views from the public on the proposals related to introduction of a relaxed regulatory framework in the Mutual Funds (MF) segment viz, “the MF Lite Regulations” for the passively managed MF schemes. Considering the lesser risk inherent in managing passively managed MF schemes, the proposed MF Lite Regulations intend to reduce the compliance requirement, foster innovation, encourage competition and promote ease of entry for the MFs interested in launching only passive schemes.”
Here are some key highlights of the proposal
- New AMCs will have two routes to apply for MF Lite regulations – main eligibility route and alternate eligibility route. While main eligibility route is for companies, which have 5 years of experience in financial services industry with positive networth of 5 years, companies which do not have prior experience or do not meet eligibility criteria can apply from alternate route
- For main route, the networth requirement is Rs.35 crore (have to be deployed in liquid assets perpetually), such a requirement will be Rs.75 crore under alternate route with lock-in period of 3 years
- AMCs under main route can reduce the networth to Rs.25 crore if they remain profitable for 5 consecutive years
- There is no requirement to appoint Chief Risk Officer. Compliance Officer can take this responsibility
- Combined experience of key employees of AMCs coming through alternate route should be at least 20 years
- If private equity or PE company wants to become sponsor of AMCs offering passive funds, they should have experience to manage drawdown of Rs.2500 crore
- While all new players wanting to launch only passive funds will have to register under MF lite regulations, exiting players may segregate their active and passive businesses by floating a separate entity with a common sponsor
- Existing fund house may also sell their passives business to other entity if they segregate their active and passive business. There is no need to sell the entire MF business
- A sponsor will be permitted to hold 2 registrations under MF regulations and MF lite regulations
- MFs offerings passive funds can come with simpler advertisements
- Appointment of audit committee and risk management committee are optional
- AMCs can do transaction of up to 10% from associated brokers
- There is no need to deduct 1bps for investor education from FoF investing over 80% of its corpus in domestic passive funds
- Such a relaxation is also extended to passive funds having AUM of up to Rs.250 crore
- For other schemes, AMCs can deduct 0.5 bps of the AUM to facilitate investor education
- AMFI has to spend 5% from the 1 bps corpus to spread awareness about passive funds
- International passive funds will have to follow guidelines in line with domestic passive funds. For instance, the underlying international index should comprise at least 10 stocks
- While target maturity funds have fixed tenure, they are open ended in nature. Hence, SEBI proposes to introduced close ended debt funds
You can submit your comments to SEBI by July 22, 2024.
