Sebi Issues Light Mutual Fund Regulations for Passive Funds; aims to lighten the burden of compliance

Market regulator Sebi is introducing light regulation for passive fund mutual funds as part of efforts to reduce compliance burdens, promote growth and lower costs for investors, a senior official said Friday.

Passive funds are an investment vehicle that tracks a market index or a specific market segment. These funds include passive index funds, Exchange Traded Funds (ETFs), and funds of funds that invest in ETFs.

The regulator is trying to reduce compliance requirements for passive funds that are tied to changes in the underlying index and operate on a non-discretionary basis.

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To allow for passive investments, such as index funds and ETFs, the regulator is introducing light regulations for mutual funds, said Sebi Whole Time member Ananta Barua.

“This regulation will give index funds and ETFs more flexibility, allowing them to provide investors with transparency, diversification and lower costs.

“By alleviating the compliance burden, Sebi aims to promote the growth of passive investments in India’s mutual fund industry,” Barua said during a speech at the mutual funds summit hosted by industry association Assocham in the national capital.

According to him, Sebi has revised the requirements for sponsoring a mutual fund, allowing entities with sound financial conditions, including private equity funds, to sponsor without a mandatory earnings statement.

To improve liquidity in the debt market and address risk, Sebi has introduced prudential rules for open-ended mutual funds, especially debt funds, he added.

“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 fund’s net asset value (NAV),” he said. Barua also stressed that Sebi is committed to promoting good governance practices in the mutual fund industry.

“Trustee oversight of asset management companies (AMCs) has been strengthened and they now have additional responsibilities for overseeing the fairness of fees and expenses, the performance of AMCs, preventing market abuse and avoiding conflicts of interest. “Furthermore, mutual funds are encouraged to exercise their stewardship role by actively participating in voting and corporate governance issues of the companies in which they invest,” he noted.

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