To accommodate passive investments, such as index funds and ETFs, the regulator is introducing mutual fund light regulations, Sebi whole-time member Ananta Barua said. “These regulations will provide greater flexibility for index funds and ETFs, enabling them to offer transparency, diversification, and lower costs to investors. By easing the compliance burden, Sebi aims to foster the growth of passive investments in the Indian mutual fund industry,” Barua said.
“These regulations include requirements for minimum liquidity buffers, restrictions on investments in a single company or sector, and self-testing to assess the impact of market movements on the Net Asset Value (NAV) of the fund,” he said.
“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. Moreover, 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 noted.
“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,” he further added.
“Additionally, Sebi mandates regular disclosures of portfolio details for debt funds every 15 days. This transparency empowers investors to make informed decisions and helps ensure fair treatment,” Barua said at the mutual fund summit organised by industry body Assocham in the national capital.
Commenting on the development by SEBI, Milan Sharma, Founder, 35North Ventures, VC FIRM said “It’s a welcome move as it will reduce the cost of compliance for passive funds and ETF. The passive fund and etc. have very less charges when compared with mutual funds, but the compliance was similar for both the assets. The passive funds and ETF are holding huge investments of retail investors, and this step is moved in the right direction. Billions of dollars are waiting to enter via ETF route, and this kind of rationalisation of compliance cost will help these dollars move faster to the capital market, and this, in turn, will give strength to the markets. Overall, it was a positive move from SEBI.”
Ashutosh Goyal, CEO and Founder of Flipshope said “As an entrepreneur, I welcome the recent announcement by the Securities and Exchange Board of India (SEBI) regarding the issuance of mutual fund light regulations for passive funds. This move reflects SEBI’s commitment to promoting a conducive environment for the mutual fund industry while ensuring investor protection. By introducing lighter compliance requirements specifically tailored for passive funds, SEBI acknowledges the unique characteristics and investment strategies employed by such funds, thereby reducing the burden on asset management companies.”
“The new regulations will undoubtedly benefit both the industry and investors. With streamlined compliance procedures, asset management companies can focus more on managing portfolios and delivering optimal returns to investors.The simplified regulations will encourage the growth of passive funds, which offer cost-effective and diversified investment options to retail and institutional investors alike. This move aligns with our organization’s vision of democratizing investing and empowering individuals to participate in the capital markets, fostering financial inclusion and wealth creation. We appreciate SEBI’s proactive approach in addressing the industry’s needs and look forward to leveraging these new regulations to enhance our product offerings and deliver superior value to our clients,” Ashutosh Goyal further added.
Exchange-traded funds (ETFs), passive index funds, and funds of funds that invest in ETFs are examples of passively managed funds. As they follow a market index or benchmark, passive funds give investors exposure to the benchmark indices directly without the presence of a fund manager.
Sonam Chandwani, Managing Partner KS Legal & Associates said “The Securities and Exchange Board of India’s (SEBI) prospective ‘mutual fund light’ regulations could catalyze a notable shift in the passive fund sector. The implications of a diminished compliance burden could streamline operations, promoting a more competitive landscape that potentially benefits investors through more advantageous pricing. However, it is imperative that the core tenets of investor protection remain sacrosanct, ensuring transparency, fairness, and market integrity are upheld. Furthermore, the introduction of these regulations poses pertinent questions: will they engender an unbalanced playing field disadvantaging active funds? How can misuse of these lenient regulations be preempted and forestalled? Finally, the true efficacy of these regulations hinges on their specific stipulations, which warrants rigorous scrutiny upon their release. While the proposal potentially acknowledges the escalating importance of passive funds, it is cardinal to maintain the equilibrium of investor protection and market fairness.”
Suman Bannerjee, CIO, Hedonova, a US based Hedge Fund said “The Securities and Exchange Board of India (SEBI) is planning to reduce compliance requirements for passive funds that track market indices or specific market segments, such as passive index funds and exchange-traded funds (ETFs). The move is aimed at fostering the growth of passive investments in the Indian mutual fund industry. The regulator is introducing “mutual fund light” regulations to provide greater flexibility to index funds and ETFs, enabling them to offer transparency, diversification, and lower costs to investors. SEBI is also implementing prudential regulations for open-ended mutual funds, particularly debt funds, to enhance liquidity in the debt market and address risks.”
“These regulations include requirements for minimum liquidity buffers, restrictions on investments in a single company or sector, and self-testing to assess the impact of market movements on the Net Asset Value (NAV) of the fund. SEBI is committed to promoting good governance practices in the mutual fund industry, with strengthened trustee supervision of Asset Management Companies (AMCs) and encouragement for mutual funds to actively participate in voting and corporate governance matters. The regulator is also focused on transparency, requiring regular disclosures of portfolio details for debt funds and providing comprehensive information about mutual fund portfolios on fund websites,” said Suman Bannerjee.
Pratapsingh Nathani, chairman and MD at Beacon Trusteeship said SEBI plans to issue Mutual Fund Light regulations for passive funds in order to ease the compliance burden for passive funds, such as index funds and exchange-traded funds (ETFs).
Passive funds are a type of mutual fund that tracks a particular market index, such as the Nifty 50 or the Sensex. They are designed to provide investors with a low-cost way to track the performance of the market.
The current regulations for mutual funds can be quite burdensome, particularly for passive funds. This is because passive funds do not need to employ a large number of analysts or traders. As a result, they can save on costs and pass these savings on to investors. The Mutual Fund Light regulations are expected to reduce the compliance burden for passive funds by streamlining the registration process and reducing the number of reports that need to be filed. This will make it easier for new passive funds to enter the market and will help to lower the cost of investing in passive funds.
The Mutual Fund Light regulations are still in the early stages of development, but they are expected to be issued by SEBI in the near future. Once they are issued, they will provide a much-needed boost to the growth of the Indian passive fund industry. Investors will be able to access detailed information about the portfolio of a scheme, including its performance and holdings, on the fund’s website itself. SEBI proposes to seek portfolio disclosure every fortnight which will empower investors to make better & informed decisions for their investments.
The proposed Mutual Fund Light regulations will help to :
1. Reduce compliance burden for the passive funds, making it easier for new funds to enter the market and for existing funds to operate more efficiently.
2. Lower their operating costs which will reduce the compliance burden leading to lower costs for passive funds, which in turn can be passed on to investors in the form of lower fees.
3. Increase the market competition amongst Mutual Fund players which will benefit investors by driving down fees and improving performance.
With inputs from PTI
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Updated: 26 May 2023, 09:02 PM IST