Market regulator Sebi proposes MF Lite regulations for passive AMCs

The Securities and Exchange Board of India (Sebi) on Monday proposed to introduce a lighter version of mutual fund (MF) regulations for 'passive only' fund houses.

Existing asset management companies (AMCs), which offer both active and passive funds, will also have the option of hiving off the passive business to a separate entity under the new MF Lite norms.

"Considering the lesser risk inherent in managing passively managed MF schemes, the proposed MF Lite Regulations intend to reduce the compliance requirement, foster innovation, encourage competition and promote ease of entry for the MFs interested in launching only passive schemes," Sebi said.

The regulator also plans to introduce new categories in the passive space, according to a consultation paper put out by Sebi.

If the proposals go through, fund houses will be able to launch exchange-traded funds (ETFs) and index funds in the hybrid space. The regulator has also mooted the introduction of closed-ended target maturity funds. Currently, MFs cannot launch passive hybrid funds and target maturity funds are only allowed with an open-ended structure.

The relaxation in rules under MF Lite ranges from lower net worth and profitability criteria for sponsors and AMCs to reduced reporting requirements. Under MF Lite, for a company to qualify as a sponsor as per the main eligibility criteria, it should have generated at least Rs 5 crore profit in the preceding three of the five years. According to current regulation, the requirement is a minimum of Rs 10 crore profit in each of the preceding five years.

For AMCs, the minimum net worth requirement is proposed to be Rs 35 crore, down from Rs 50 crore under present regulations. The AMC can bring down the net worth to Rs 25 crore after attaining profitability for five consecutive years. If the sponsor takes the alternative eligibility route, it will have to maintain a minimum Rs 75 crore net worth of the AMC.

The passive-only AMCs will also have the leeway to make up to 10 per cent of the transactions through associated brokers, up from 5 per cent under existing regulations. The minimum combined experience requirement for the CEO, COO, CCO and CIO of passive-only AMCs will also be lower at 20 years as against 30 years currently.