The Securities and Exchange Board of India (Sebi) plans to introduce the Mutual Fund (MF) Lite regulations for asset management companies (AMCs) offering passive-only products in the current financial year, reported market daily Business Standard.
As per the report, the proposed framework aims to reduce the compliance burden by 90 percent and remove limitations on networth and experience for those offering exchange-traded funds (ETFs) and index funds—where investment decisions are not discretionary, but tied to changes in the underlying benchmark index.
The move is seen as a game changer for the passive fund industry, which currently accounts for less than a fifth of the MF industry’s ₹40 lakh crore assets under management (AUM), or ₹6.7 lakh crore, highlighted BS.
“If MF regulations are 100 pages today, the target of the Sebi team is to bring it down to just 10 pages… and that’s going to come for passive funds,” explained Sebi Chairperson Madhabi Puri Buch after the regulator’s board meeting last week.
She said current MF regulations were built around active fund management and there was no reason for someone who wanted to only offer passive funds to comply with all the norms.
Industry players feel MF Lite could foster innovation and encourage global ETF majors like Vanguard and State Street to set up shop in India, said BS.
“Though more clarity is awaited, we can expect some reviews and relaxations on net worth, profitability norms, and eligibility criteria which could give space to fintech, discount broking platforms, and other such PE-backed players in the passive category. As the AMC would still be managing public money, there will be no chance of dilution of responsibilities towards investors,” Anil Ghelani, head of passive investments at DSP Mutual Fund told BS.
“This significant reduction in regulations is expected to speed up innovation in the industry, specifically related to the basket of index-related funds. The expansion could be something that we have seen in the US. However, as it is already a very competitive market, the differentiation may come up in service rather than at product level,” said Pratik Oswal, head of passive funds at Motilal Oswal AMC.
The variety of offerings in the passive category has also expanded beyond equity indices to debt, silver ETFs, gold ETFs, and overseas funds of funds and experts said that MF Lite regulations could increase competition in this segment.
However, it is unclear how many existing players would make the switch from active to passive given the low profitability and spreads offered by the latter, questioned BS.
