SEBI to Ease Compliance Constraints for Passive Funds by Introducing Mutual Fund Light Regulations

The Securities Exchange Board of India (SEBI) intends to implement 'Mutual Fund Light Regulations' to ease compliance requirements for the Passive Funds category of Mutual Funds. Passive funds are investment vehicles that monitor the performance of a market index or a specific market sector. These funds include passively managed Index funds, Exchange Traded Funds (ETFs), and Fund of Funds investing in ETFs.

This move by SEBI is meant to boost passive investments in the Indian mutual fund industry. These light regulations will endeavour to foster growth of passive funds and provide greater flexibility for index funds and ETFs, enabling them to offer transparency, diversification, and lower costs to investors.

Furthermore, Mr Ananta Barua, Whole Time Member of SEBI and keynote speaker at the 15th Mutual Fund Summit 2023, stated that transparency has always been a cornerstone of the mutual fund industry.

SEBI has carried out various improvements to promote mutual fund transparency, which allows investors to make informed decisions and helps to ensure fair treatment. As a result, the regulator has altered the conditions for sponsoring a mutual fund, allowing private equity funds to become sponsors without having to demonstrate a profit track record.

Additionally, SEBI has implemented prudential regulations on open-ended mutual funds, especially debt funds, to enhance liquidity in the debt market and temper market risks. These regulations include requirements for minimum liquidity buffer requirements, prohibitions on investments in a single firm or sector, and self-testing to analyse the impact of market moves on the fund's Net Asset Value (NAV).

Moreover, Mr Ananta Barua in the Mutual Fund Summit 2023 mentioned that, “SEBI is committed to promoting good governance practices in the mutual fund industry. 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. As a result, mutual funds are encouraged to exercise their stewardship role by actively participating in voting and corporate governance matters of the companies they invest in.”