The Securities and Exchange Board of India (SEBI) on Monday (1 July, 2024) proposed a simplified set of regulations for mutual fund companies that focus solely on passive investments.
Under these new “MF Lite” regulations, current asset management companies (AMCs) that manage both active and passive funds can choose to separate their passive investment operations into a distinct entity.
This initiative aims to reduce compliance burden and encourage innovation and competition in the passive fund market.
“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,” said SEBI, in a consultation paper.
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New categories for investors: Hybrid ETFs and Index Funds
SEBI is also planning to introduce new categories within passive investments, as outlined in a consultation paper.
If these proposals are approved, mutual fund houses will have the option to launch exchange-traded funds (ETFs) and index funds in the hybrid space. This would be a significant change since mutual funds currently cannot offer passive hybrid funds.
Additionally, SEBI is considering the introduction of closed-ended target maturity funds, which would complement the existing open-ended structure for these funds.
The proposed MF Lite regulations include several relaxations:
Lower Financial Requirements
– Sponsors and asset management companies (AMCs) will benefit from reduced net worth and profitability criteria.
– To qualify as a sponsor, a company must have earned at least Rs 5 crore in profit in three of the last five years, as opposed to the current requirement of Rs 10 crore profit in each of the previous five years.
Simplified Reporting Requirements
– The new regulations aim to reduce the reporting burden on these entities, making compliance easier and fostering innovation and competition in the mutual fund industry.
Under the proposed changes, the minimum net worth requirement for asset management companies (AMCs) is set to decrease from Rs 50 crore to Rs 35 crore.
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Once an AMC achieves five consecutive years of profitability, it can further reduce its net worth requirement to Rs 25 crore. If a sponsor chooses the alternative eligibility route, the AMC must maintain a minimum net worth of Rs 75 crore.
Additionally, AMCs focused solely on passive funds will have more flexibility in their transactions. They will be allowed to conduct up to 10% of their transactions through associated brokers, an increase from the current limit of 5%.
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Furthermore, the required combined experience for the CEO, COO, CCO, and CIO of passive-only AMCs will be reduced from 30 years to 20 years.
These changes are intended to make it easier for companies to enter and thrive in the mutual fund market while providing investors with more diverse and flexible investment options.
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