Sebi notifies mutual fund lite regulations. Here is what you should know
- The MF Lite regulations offer relaxation on net-worth eligibility and reduce obligations for trustees.
The Securities and Exchange Board of India (Sebi) has notified Mutual Fund (MF) Lite regulations, allowing fund houses focussing only on passively managed schemes to get a licence with less stringent criteria.
In a July consultation paper, the capital markets regulator proposed a relaxed framework with light-touch regulations, known as MF Lite Regulations, for passive MF schemes.
The intent is to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity, and foster innovation, Mint reported earlier.
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“This is a positive move. An enabling and conducive regulatory environment for the passive space can benefit the entire ecosystem over time. We will have to wait and see how this takes shape,” said Swarup Mohanty, chief executive of Mirae Asset India MF.
Here are some of the exceptions Sebi is allowing asset management companies (AMCs) looking to register for MF Lite.
Net-worth criteria
The MF Lite Regulations state that the minimum net-worth criteria for a mutual fund should be ₹35 crore. If the MF Lite AMC can demonstrate profits for five consecutive years after getting the licence, the net worth requirement can be reduced to ₹25 crore.
The applicant entity must have a “sound track record”. Sebi has defined the sound track record as having net profits in three out of five preceding years, including the fifth year, average net profit of ₹5 crore over the five years and positive net worth in each of the five preceding years.
Additionally, the positive liquid net worth should be more than the sponsor's proposed capital contribution in the MF Lite asset management, and the same should be ensured when there is a change of control due to the acquisition of shares.
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"It means that the sponsor must have sufficient funds to meet financial obligations, both when initially contributing capital and when acquiring control through share purchases. This is to ensure the financial stability of the company," said a fund house executive on the condition of anonymity.
The regular MF regulations require a minimum net worth of ₹50 crore, along with a sound track record.
Under MF Lite, the regulator will consider applications, even if the applicant doesn't meet any of the sound track-record conditions. However, in that case, the net-worth requirement will be much higher: ₹75 crore.
Role of trustees
While trustees will continue to play an important role in the MF Lite platform, their obligations and duties will be restricted to protecting the interests of unitholders.
“The trustees shall be accountable for, and be the custodian of, the funds and property of the respective MF Lite schemes and shall hold the same in trust for the benefit of the unitholders in accordance with this chapter and the provisions of the trust deed,” the rules read.
Some of the other aspects of the business, which are also the responsibility of the trustees in regular MF structure, will be the sole responsibility of the MF Lite AMC or its directors.
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“The MF Lite AMC shall be responsible for the calculation of any income due to be paid to the MF Lite and also any income received in the MF Lite, for the unitholders of any scheme of the MF Lite, in accordance with these regulations and the trust deed,” the notification read.
“The board of directors of the MF Lite AMC shall ensure that the MF Lite AMC has been diligent in empanelling the brokers in monitoring securities transactions with brokers and avoiding undue concentration of business with specific brokers,” the notification said.
The MF Lite regulations allow a debenture trustee to be appointed as trustee. The same debenture trustee can also be the trustee of multiple fund houses; thereby potentially bringing down the costs of appointing trustees for the MF Lite AMC.
Business demerger
The new rules even allow existing fund houses to demerge their passive business into the MF Lite business. However, if the existing fund house decides to demerge the business, only the passive fund house eligible under the MF Lite regulations would be allowed to launch passively managed schemes.
The original fund house would only be allowed to launch actively managed schemes.
Investor takeaways
While the rules are more industry-focused, over time, there can be benefits for investors, too.
An enabling environment for passive business can lead to more passive-only MFs and products, which could, in turn, increase the liquidity of passive products on stock exchanges.
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The lack of liquidity has been one of the challenges faced by passively managed funds. There have been instances when a passively managed exchange-traded fund (ETF) is trading at a steep discount or premium to its underlying index due to market volatility and the lack of liquidity.
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Business NewsMutual FundsNewsSebi notifies mutual fund lite regulations. Here is what you should know
First Published:17 Dec 2024, 06:18 PM IST
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