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SEBI has notified the "Mutual Fund Lite" (MF Lite) regulations, which aim to make the entry of passive fund players easy. Simply put, entities who want to launch only passive products need not comply with the entire MF regulations.
SEBI said that companies that deal with MF Lite will be known as Mutual Fund Lite AMCs.
MF Lite means a fund house having index funds, ETFs, fund of funds or other MF schemes as specified by SEBI, said the regulator.
The regulations provide two routes for entry for sponsors of the MF Lite, which can be entered by both experienced financial institutions and newer entrants.
For companies with established track records, the main route requires:
- Positive networth in all preceding five years
- The sponsor’s liquid net worth should be higher than their capital contribution to the MF Lite AMC.
- Net profits in three out of the previous five years for the sponsor or average net annual profit of at least Rs. 5 crore (after depreciation, interest and tax) over five years
- Minimum networth requirement of Rs. 35 crore for the Mutual Fund Lite AMC
- Option to reduce networth to Rs. 25 crore after five consecutive profitable years for the Mutual Fund Lite AMC
For companies that don't meet the standard track record requirements, SEBI has provided an alternate route with additional safeguards:
- Sponsor has to provide Rs. 75 crore, which will be held in a three-year lock-in period
- Minimum networth requirement of Rs. 50 crore for the asset management company
- Mandatory three-year lock-in period of Rs. 75 crore for initial shareholding
- Combined experience of at least 20 years among key personnel (CEO, COO, Chief Compliance Officer, and Chief Investment Officer)
Other details on the MF Lite and the responsibilities of Mutual Fund Lite AMCs include:
- Mutual Fund Lite AMCs can do transaction of up to 10% from associated brokers
- The sponsor should contribute 40% towards the networth of the Mutual Fund Lite AMC
- The Mutual Fund Lite AMC will be responsible for payment of commissions to distributors
- The Mutual Fund Lite AMC will be responsible for the appointment of debenture trustee registered with SEBI
- An existing shareholder with 10% or more ownership or voting rights in a mutual fund’s asset management company can hold the same in a mutual fund lite asset management company of the same company’s group entity.
- The MF Lite AMC will have to create a Unit Holder protection committee
- The MF Lite AMC have to set up risk management and investor protection framework
- Private equity funds and pooled investment vehicles permitted to become sponsors of MF Lite, subject to conditions as specified by SEBI
- Existing mutual funds can transfer eligible passive schemes to MF Lite structure, subject to conditions by SEBI
- Sponsors allowed to hold registrations under both regular MF and MF Lite regulations, subject to conditions by SEBI
- The Chief Executive Officer will be responsible for the overall risk management of the MF Lite
- No one who is found guilty of economic offense will be allowed to be appointed as key personnel
- Operations including trading desk and unitholder servicing must remain within India
- The mutual fund lite asset management company must ensure that no changes affecting the scheme, trust, fees, expenses, or unit holders' interests are made unless: 1) A written notice is sent to each unit holder, and an advertisement is published in one national English newspaper and a regional newspaper. 2) Unit holders are given the option to exit at the current Net Asset Value without any exit load.
- Have to have a mandatory whistle-blower policy
- Mutual Fund Lite AMCs must have regular reporting to trustees and SEBI.
