The Securities and Exchange Board of India (SEBI) has introduced the Mutual Fund (MF) Lite regulations, which will allow fund houses focused exclusively on passively managed schemes to obtain a license with less stringent criteria.
Key Highlights of MF Lite Regulations
Relaxed Entry for Passive Funds
In its consultation paper from July, SEBI proposed a framework with lighter regulations aimed at promoting ease of entry for new players in the passive fund market. The goal is to encourage more participation, reduce compliance burdens, improve market liquidity, and foster innovation, according to Mint.
Net-Worth Criteria
Under the MF Lite framework, the minimum net worth requirement for a mutual fund is set at ₹35 crore. If the fund house can demonstrate consistent profits for five consecutive years after receiving the license, the net worth requirement can be lowered to ₹25 crore. In contrast, the regular MF regulations require a net worth of ₹50 crore for active funds. If an applicant does not meet the track-record conditions, a higher net worth of ₹75 crore is required.
Track Record Requirements
To meet SEBI’s definition of a “sound track record,” the applicant must have net profits in three out of the last five years, with an average net profit of ₹5 crore. The entity should also maintain positive net worth over the five-year period. The sponsor must ensure sufficient funds for both initial capital and potential future control changes.
Role of Trustees
Trustees will continue to safeguard the interests of unitholders, but their duties will be more narrowly focused. The MF Lite asset management company (AMC) will assume responsibility for several operational aspects typically managed by trustees in traditional structures.
Cost-Effective Trustee Model
The MF Lite regulations allow for the appointment of a debenture trustee, who can also serve as the trustee for multiple fund houses. This could reduce the costs associated with trustee appointments for MF Lite AMCs.
Demerger of Passive Business
Existing fund houses can demerge their passive fund business into a new MF Lite entity. However, only the MF Lite fund house can launch passively managed schemes. The original fund house will be limited to launching actively managed schemes.
Investor Takeaways
While the new regulations primarily target the industry, they also offer potential long-term benefits for investors. By creating a more favorable environment for passive funds, there could be an increase in liquidity for passive products, which has been a key challenge. Passively managed funds, particularly Exchange-Traded Funds (ETFs), have occasionally faced liquidity issues, leading to instances where ETFs trade at significant premiums or discounts compared to their underlying index. The MF Lite regulations could address this issue by encouraging more passive-only fund offerings.
These changes are expected to make it easier for new players to enter the passive fund market, thereby enhancing product diversification and market liquidity, benefiting investors in the long run.
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