Capital markets regulator Sebi is engaged with the mutual fund industry to introduce 'MF Lite' regulations for passive funds, a move that will reduce the compliance burden and foster innovation.
A passive fund is an investment vehicle that tracks a market index or a specific market segment. These funds include passive index funds, Exchange Traded Funds (ETFs), and Fund of Funds investing in ETFs.
"Since the current MF regulatory framework was built around active fund management, Sebi is planning to introduce Mutual Fund Lite regulations for passive funds, wherein investment decisions are not discretionary, but tied to changes in the underlying benchmark index," the regulator said in its annual report for 2022-23, which was released on Monday.
These new regulations are expected to significantly reduce the compliance requirements of passive funds and foster innovation in the passive fund ecosystem, it added.
The regular mutual fund schemes, which raise money from the public, have to comply with a number of regulations.
In regular mutual funds, investment decisions are at the discretion of the fund manager and since lakhs of small investors trust mutual funds, these have stringent requirements, including high Asset Management Companies (AMC) net worth, experienced investment team, among others, Sebi said.
However, if a mutual fund desires to offer only passive investment products such as ETFs and index funds -- where investment decisions are not discretionary, but are tied to changes in the underlying benchmark index -- then there is a case to provide them a regulatory framework with fewer compliance requirements, it added.
Accordingly, Sebi is currently engaged with the mutual fund industry to introduce 'MF Lite' for such entities.
Earlier in May, Sebi Whole-Time Member Ananta Barua said the regulator will come out with mutual fund light regulations for passive funds.
In its annual report, Sebi said the current regulatory rules applicable for fees and expenses charged by mutual fund schemes will be reviewed to encourage new participants, discourage cross-subsidisation across schemes, and curb malpractices.
The regulator in May came out with a consultation paper proposing sweeping changes to mutual funds' total expense ratio, which accounts for the fees and expenses charged by AMCs.
Sebi is also considering allowing them to sell credit default swaps for the purpose of taking exposure in synthetic corporate bonds to provide additional investment products for mutual funds.
In the coming year, Sebi said it expects to see the launch of more facilities that are global firsts, such as the Investor Risk Reduction Access platform -- a special window for facilitating investors to directly access the stock exchanges in the event of significant downtime of broker -- and a SaaS-based model for clearing corporations to deal with cybersecurity events.
Besides, one of the key focus areas for Sebi will continue to be the facilitation of financial inclusion in the securities market in the coming years.
"We expect that technology will enable financial products and services offerings to be made available in a cost-effective manner, in every nook and corner of the country, without compromising on risk management and prudential norms as may be necessary," Sebi said.
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