Securities and Exchanges Board of India on July 1 proposed to introduce a relaxed regulatory framework in the Mutual Funds segment namely the MF Lite Regulations to help existing fund houses offer passive funds easily and also facilitate ease of entry to new passive fund players. It proposed to reduce the net worth and profit track record criteria for both existing mutual fund players and new players if they are interested only in managing assets passively.
"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 scheme," Sebi explained the rationale of its consultation paper released yesterday. The public can send their comments by July 22, 2024.
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Key Provisions in MF Lite Regulations
Asset Management companies can either take the main or alternate eligibility route to offer passive funds. Existing fund houses can create a separate section for their passive fund businesses which may be registered under the MF Lite Regulations. Such companies should have 5 years of experience in the financial services industry with positive net worth in the immediately preceding five financial years and net profit in three of them.
They should have a networth of Rs. 35 crore reduced from the erstwhile requirement of Rs 50 crore. The sponsor has to completely segregate and ring-fence its resources, including infrastructure, technology, and staff, for passive fund management from active management.
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AMCs entering passive business through alternative eligibility routes must maintain a net worth of at least Rs 75 crore, down from the current requirement of Rs 150 crore.
The combined experience requirement for key employees (CEO, COO, CRO, CCO, and CIO) will be reduced from 30 years to 20 years under the MF Lite regulations. Further three sets of hybrid passives, including debt-oriented (Equity: Debt-25:75), balanced (Equity: Debt-50:50), and equity-oriented (Equity: Debt-75:25) can be launched under MF Lite regulations. Further, the appointment of an audit committee and risk management committee is optional.
Sebi suggests that Scheme Information Documents (SIDs) for passive schemes under MF Lit parameters like investment strategy and benchmark performance can be removed to focus on more relevant metrics like tracking error, tracking difference, etc.
