SEBI’s New Mutual Fund Scheme for Passive Funds

Introduction

Through a recent notification, the Securities and Exchange Board of India has given its approval for a simplified framework for regulation of entities that are looking forward to launching passive mutual fund schemes named as “MF Lite” scheme which aims to reduce the requirements for compliance along with encouraging new market entities.

Additionally, having a liberal approach, the MF Lite Scheme also aims to feature relaxed requirements pertaining to eligibility of sponsors include tracking of net worth, profitability as well as changes to the responsibilities of trustees and the processes for approvals. Under the presently applicable framework of mutual funds, the regulations are uniformly applicable to all schemes and do not differentiate between the application of various provisions of entry barriers or net worth, track record and other requirements necessary for entities planning to launch only passive funds.

Key Changes in the New Mutual Fund Scheme

1. Simplified Process for Approval- The New Mutual Fund Scheme “MF Lite” has improved the process for obtaining approval for launching passive mutual fund schemes by streamlining the process and removing entry barriers.
2. Reduced Requirements for Disclosure- There has been a considerable reduction in the compliance and disclosure requirements, leading to a lesser burden upon the mutual fund houses to operate.
3. Relaxed Criteria for Eligibility- The sponsors setting up Mutual Fund Schemes will have to undergo lesser stringent requirements in terms of disclosing and maintaining their net worth, track records and profitability.

There are various objectives which the scheme aims to achieve which include easing the entry process in the mutual funds market so that new players can easily gain access to the stakeholders and carry forward their activities, reducing barriers so that increased penetration can be achieved along with larger number of players in the market which would contribute to increased liquidity and competition and a wider range of passive fund options which would provide greater diversification opportunities. Lastly, the simplified framework would also foster innovation and development of newer passive fund products which would aim to boost market participation, increase investment and improve mutual funds liquidity.

Moreover, existing Asset Management Companies with both passive and active schemes have been allowed to hive off their passive schemes into a separate entity which would result in the management of active and passive schemes under a single common sponsor.

Conclusion

There has been a phenomenal surge in the mutual funds industry in India in the past decade with nearly a growth rate of seven times in the market capital and assets under the mutual funds companies. Through this new notification, the SEBI has allowed operational flexibility to the AIFs to offer differential rights to certain investors without disturbing the rights of other parties. Secondly SEBI’s emphasis on the pro – rata rights and easing of other procedural norms has also led to investors feeling confident in the domestic fund structures and maintain a consistent and holistic regulatory policy which would benefit all the stakeholders at large.

Last but not the least, this scheme would not only benefit the existing entities operating in the mutual funds market but would also allow various new players to freely enter the markets, leading to fostering a healthy competition which would benefit the economy at large.