SEBI announces MF Lite framework for passive funds

On Monday, the Securities and Exchange Board of India (SEBI), which oversees the markets, approved “light touch” regulations and a more lenient framework for companies looking to introduce solely passive mutual fund schemes. SEBI stated in a statement that the Mutual Funds Lite (MF Lite) framework, also known as light touch regulations, has loosened requirements for sponsors’ eligibility, including net worth, track record, and profitability, trustee responsibilities, the approval process, and disclosures.

The Mutual Funds Lite (MF Lite) framework:

The framework aims to facilitate investment diversification, encourage new players, lower compliance requirements, boost penetration, improve market liquidity, and encourage ease of entry. It also hopes to stimulate innovation.Passively managed mutual fund schemes, such as exchange-traded funds (ETFs) and index funds, allow for easy portfolio tracking. Expert fund managers who choose securities and define investment philosophies are necessary for active fund schemes.

MFs currently operate under a framework that regulates all schemes uniformly, with no differentiation made regarding the applicability of entry barrier provisions like net worth, track record, profitability, or other compliance requirements for entities that may opt to launch only passive funds. The MF Lite Regulations are a lax regulatory framework with few restrictions that apply to passive mutual fund schemes, as some of the provisions of the current framework may not apply to such schemes.This means that MFs who want to manage only passive schemes (like index funds and exchange-traded funds) should be subject to the MF Lite Regulations.

The Securities and Exchange Board of India (SEBI) stated:

According to SEBI, current AMCs with both active and passive schemes will be able to split off their respective passive schemes to a different group entity if they so choose. This will lead to the management of active and passive schemes by different AMCs under a single sponsor.

The relaxed disclosures and other regulatory requirements for the passive schemes based on indices that would be covered under the MF Lite framework would also apply to them if they decide to keep the passively managed schemes running within the current AMCs under the current MF Regulations.

Conclusion: In order to facilitate the separation of active and passive asset management companies into their respective categories, SEBI has introduced the Mutual Funds Lite (MF Lite) framework.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.