SEBI launches new regulatory framework for passive mutual funds - Understanding Null Hypothesis in Financial Analysis

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The Mutual Funds Lite framework is designed exclusively for passive mutual fund schemes. Credit: Poetra.RH/Shutterstock.

The Securities and Exchange Board of India (SEBI) has introduced a new regulatory framework, the Mutual Funds Lite (MF Lite), tailored specifically for passively managed mutual fund schemes.

This initiative aims to simplify entry processes, encourage new market entrants and reduce compliance burdens within the sector.

The current regulatory provisions for mutual funds do not distinguish between active and passive schemes, leading to unnecessary barriers and costs for entities focused solely on passive funds.

The MF Lite framework is set to address these issues by offering flexible and less strict system, promoting ease of entry and increased market liquidity.

A Working Group formed by SEBI recommended this relaxed regime, which was then deliberated by the Mutual Funds Advisory Committee (MFAC).

Following these discussions, amendments were made to the SEBI (Mutual Funds) Regulations, 1996.

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Under the MF Lite framework, specific types of passive schemes, including index funds, exchange-traded funds (ETFs), and fund of funds (FoFs), will be classified as MF Lite schemes. The initial phase of implementation will cover passive schemes based on select underlying indices.

For equity passive schemes targeting overseas indices, uniform guidelines have been established. These include standardisation of indices across the industry and a diversification requirement of a minimum of ten securities in an equity index portfolio.

Only indices with an AUM exceeding $20bn as of 31 December each financial year will be eligible in the first phase. The Association of Mutual Funds in India (AMFI), in consultation with SEBI, will periodically prescribe the list of eligible overseas equity indices.

In the event of a change in control of an MF Lite Asset Management Company (AMC) due to share acquisition, the sponsor must ensure sufficient liquid net worth or asset encumbrance, excluding the shares of the proposed AMC.

Additionally, the sponsor’s stake in the AMC must always remain free from encumbrance. The registration process for MF Lite schemes will also be streamlined.

Fast-tracking of scheme information documents (SIDs) will be mandatory for passive schemes under the MF Lite framework, and separate key information memoranda (KIM) filings for these schemes will not be required.

In 2023, SEBI updated mutual fund rules, allowing private equity firms to sponsor schemes and set up self-sponsored asset management companies (AMCs).