SEBI Brings MF Lite Regulations To Simplify Compliance For Passive Schemes

The market regulator, the Securities and Exchange Board of India, has brought the Mutual Fund Lite Regulations to bring compliance relaxations for the passively managed schemes. The proposals to bring such regulations were first made by the regulator in July this year. 

The private equity funds have now been allowed to sponsor MF Lite schemes if they fulfil the criterion of having at least five years of experience and managing a minimum of Rs 2,500 crore in committed capital.

The asset management companies dealing with such schemes can see several benefits. This includes locking in the sponsor’s stake in Co. for three years and safeguards to prevent conflicts of interest, such as prohibiting off-market transactions between the MF Lite schemes and their sponsors.

Additionally, the AMC must maintain a minimum net worth as per SEBI-specified regulations. However, if an AMC’s total assets under management (AUM) exceed Rs 1 lakh crore, it will have to meet the standard net worth requirements outlined in SEBI’s broader mutual fund regulations.

Additionally, the Association of Mutual Funds in India (AMFI), in collaboration with SEBI, is tasked with prescribing a standardised version of the Investment Management Agreement for the MF Lite framework. 

Phase 1 of the MF Lite Framework introduces new guidelines for passive investment schemes, targeting specific types of funds that meet particular criteria. This phase focuses on simplifying the regulatory process for larger, more standardised passive funds.

The first category includes domestic equity passive funds, which track broad domestic equity indices, such as Nifty 50 or Sensex, or act as benchmarks for actively managed funds. To be included in the MF Lite framework, these funds must have a collective AUM (Assets Under Management) of at least Rs. 5,000 crore as of December 31 of each financial year.

The AMFI, in consultation with SEBI, will regularly update the list of eligible domestic equity indices that these funds can track.

The second category involves domestic debt passive funds, which are of two types: those that invest in government securities (G-Secs), treasury bills (T-Bills), and state development loans (SDL) or those based on constant duration passive debt indices.

Similar to equity funds, these funds must also have a minimum AUM of Rs. 5,000 crore as of December 31 of each year.

Gold and silver ETFs and funds of funds (FoFs) investing only in gold or silver ETFs are also included under the MF Lite framework. These funds must focus exclusively on gold or silver and offer investors a straightforward, low-cost way to gain exposure to these precious metals.

Additionally, overseas ETFs and FoFs that invest in a single overseas passive fund will be part of this phase, as long as the underlying benchmarks used by these funds are permitted under the MF Lite framework.

Funds of Funds (FoFs) that invest exclusively in a single domestic index or a single overseas index are also eligible for Phase-1 inclusion. These funds must comply with the guidelines set for domestic and overseas indices as outlined in the framework. However, FoFs that invest in multiple indices, whether domestic or overseas, will not be included in Phase 1 of the MF Lite framework.

For overseas equity passive schemes, the framework sets clear guidelines to ensure that the indices they track are broad-based and standardised across the industry. These funds must comply with a diversification requirement, which mandates that they hold a minimum of 10 securities in their equity index portfolio.

Additionally, only those overseas equity indices with a minimum AUM of $20 billion as of December 31 each year will be eligible for Phase 1.