SEBI Teams Up with Mutual Funds: Exciting ‘MF Lite’ Rules Unveiled for Passive Investments
- ByStartupStory | August 8, 2023
India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), is collaborating with the mutual fund industry to establish ‘MF Lite’ regulations aimed at passive funds. This move seeks to alleviate compliance burdens and stimulate innovation in the passive fund sector.
“Since the current MF regulatory framework was built around active fund management, Sebi is planning to introduce Mutual Fund Lite regulations for passive funds, wherein investment decisions are not discretionary, but tied to changes in the underlying benchmark index,” the regulator said in its annual report for 2022-23, which was released on Monday. These new regulations are expected to significantly reduce the compliance requirements of passive funds and foster innovation in the passive fund ecosystem, it added.
Passive funds, including index funds, Exchange Trade funds (ETFs), and funds of Funds investing in ETFs, replicate market indexes or segments. Sebi’s current mutual fund regulations cater to active fund management. The proposed MF Lite regulations for passive funds would tie investment decisions to changes in benchmark indexes, reducing compliance requirements and encouraging innovation in this sector.
Traditional mutual funds catering to the general public must adhere to numerous regulations. With investment decisions under fund managers’ discretion and to secure the trust of small investors, stringent requirements are in place. However, for mutual funds focusing solely on passive investments like ETFs and index funds, a regulatory framework with fewer compliance demands is appropriate.
In regular mutual funds, investment decisions are at the discretion of the fund manager, and since lakhs of small investors trust mutual funds, these have stringent requirements, including a high Asset Management Company (AMC) net worth and an experienced investment team, among others. Sebi said
Sebi is actively working with the mutual fund industry to introduce the MF Lite framework. Sebi’s Whole-Time Member Ananta Barua previously indicated that the regulator would formulate mutual fund light regulations for passive funds.
In its annual report, Sebi noted that current regulatory rules related to mutual fund scheme fees and expenses would be reviewed to encourage participation, prevent cross-subsidization, and counter malpractices. Sebi recently issued a consultation paper suggesting comprehensive changes to the total expense ratio of mutual funds, which encompasses AMC fees and expenses.
Sebi is also contemplating permitting mutual funds to sell credit default swaps for exposure to synthetic corporate bonds, offering additional investment products.
“We expect that technology will enable financial products and service offerings to be made available in a cost-effective manner in every nook and corner of the country, without compromising on risk management and prudential norms as may be necessary,” Sebi said. Facilitating financial inclusion in the securities market remains a core focus for Sebi, leveraging technology to make financial products accessible across India while maintaining risk management and prudential norms.
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