SEBI Plans to Reduce Compliance Checks for Passive Funds with Mutual Fund Light Regulations

May 31, 2023 Mutual Fund

The market regulator, the Securities Exchange Board of India (SEBI), always emphasises on maintaining transparency in the mutual fund industry. In the recent 15th Mutual Fund Summit 2023, Mr Ananta Barua, Whole Time Member of SEBI and keynote speaker, stated that “SEBI has carried out various improvements to promote mutual fund transparency, which allows investors to make informed decisions and helps to ensure fair treatment.”

Given that, SEBI now intends to implement ‘Mutual Fund Light Regulations’ to ease compliance requirements for the Passive Funds category of Mutual Funds.

Passive Funds are investment vehicles that monitor the performance of a market index or a specific market sector. These funds include passively managed Index Funds, Exchange Traded Funds (ETFs), and Fund of Funds investing in ETFs.

This move by SEBI to ease the compliance burden is meant to boost passive investments in the Indian mutual fund industry. These light regulations will endeavour to foster the growth of passive funds and provide greater flexibility for index funds and ETFs, enabling them to offer transparency, diversification, and lower costs to investors.

Additionally, SEBI has implemented prudential regulations on open-ended mutual funds, especially debt funds, to enhance liquidity in the debt market and temper market risks. These regulations include requirements for minimum liquidity buffer requirements, prohibitions on investments in a single firm or sector, and self-testing to analyse the impact of market moves on the fund’s Net Asset Value (NAV).

Mr Ananta Barua informed, “One significant change is the establishment of an exhibition only platform for direct plans, allowing fintech companies to offer access to a larger pool of investors. This move promotes competition and encourages the establishment of more mutual funds. Furthermore, SEBI has revised the requirements for sponsoring a mutual fund, enabling entities with sound financial conditions, including private equity funds, to become sponsors without a mandatory profit track record. SEBI has even altered the conditions for sponsoring a mutual fund, allowing private equity funds to become sponsors without having to demonstrate a profit track record.”

“SEBI is committed to promoting good governance practices in the mutual fund industry. Trustee supervision of Asset Management Companies (AMCs) has been strengthened, and they now have additional responsibilities for overseeing fairness of fees and expenses, AMC performance, prevention of market abuse, and avoidance of conflicts of interest. As a result, mutual funds are encouraged to exercise their stewardship role by actively participating in voting and corporate governance matters of the companies they invest in.” he added further.

These timely modifications in regulations by SEBI ensure that transparency has always been a cornerstone of the mutual fund industry.

You see, for passive funds, the existing regulations may be quite burdensome, as they need not employ a large number of analysts or fund managers. As a result, with the introduction of new light regulations, they could save on costs and pass these savings on to investors.

However, do note that the ‘Mutual Fund Light Regulations’ are still in the early stages of development, but they are anticipated to be issued by SEBI soon. Once they are released, they will provide the Indian passive fund sector with the much-needed push to grow. The proposed Mutual Fund Light Regulations will offer benefits like:

• Make it easier for new passive funds to enter the market and for existing funds to operate more efficiently
• Lower their operating costs
• Boost market competition that may benefit investors lower fees and improving performance.

This article first appeared on PersonalFN here