In a move that would encourage more entrants in the mutual fund industry, the capital market regulator SEBI has proposed to reduce the net worth and profit track record criteria for companies interested only in managing assets passively.
Existing fund houses can hive off their passive businesses and register under the MF Lite Regulations.
In a consultation paper issued on Monday, SEBI said the entities registered under MF Lite may not be allowed to do any asset management business activity.
SEBI has proposed that the ’sponsor’ must have a positive net worth in all of the immediately preceding five years and should have registered net profit in three out of the immediately preceding five years. The average profit in the last five years needs to be at least ₹5 crore.
The minimum net worth is proposed to be ₹35 crore, and it can be bought down to ₹25 crore in case it has profit for five consecutive years.
Market participants can give their views before July 22.
For existing AMCs, the sponsor has to completely segregate and ring-fence its resources, including infrastructure, technology, and staff, for passive fund management from active management.
MF Lite has proposed to introduce three sets of hybrid passives, including debt-oriented (Equity: Debt-25:75), balanced (Equity: Debt-50:50), and equity-oriented (Equity: Debt-75:25) which will be permitted to be launched.
Akshat Garg, AVP-Research, Choice Wealth, said the introduction of a separate regulation adds unnecessary complexity and redundancy as the existing regulations are comprehensive and sufficient to manage both active and passive funds.
By focusing solely on passive schemes framework, he said investors might miss out on the potential benefits of active management strategies.
Even with the entry of new players under new regulations, the offerings will largely be homogeneous among them, providing similar index-based returns. This limited differentiation means that the introduction of new regulations may not lead to substantial improvements in market dynamics or investor choices, he added.
If the true intent is to reduce compliance burdens, it would be more effective to streamline regulations across the entire MF industry rather than creating a separate category, he said.