Mutual fund light regulations will reduce compliance requirements for passive funds, says Sebi official

“To accommodate passive investments, such as index funds and ETFs, SEBI is introducing Mutual Fund Light regulations,” said Ananta Barua, Whole Time Member, Securities & Exchange Board of India (SEBI), who was the chief guest at the inaugural session of the 15th Mutual Fund Summit 2023 today.

Barua further explained that the Mutual Fund Light regulations seek to reduce compliance requirements for passive funds, which are tied to changes in the underlying index and operate on a non-discretionary basis. He 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”, said at the event organised by the Associated Chamber of Commerce and Industry (ASSOCHAM), an apex industry body, the theme of the summit was ‘'Investment Opportunities for New India''.

Barua also highlighted other recent changes in the mutual fund industry initiated by SEBI. He informed, “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. Furthermore, SEBI has revised the requirements for sponsoring a mutual fund, enabling entities with sound financial conditions, including private equity funds, to become sponsors without a mandatory profit track record.”

The Whole Time Member stated that transparency has always been a cornerstone of the mutual fund industry. He stated, “Investors can easily access comprehensive information about the portfolio of a scheme, including its performance and holdings, on the fund's website. 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 also stated that to further enhance liquidity in the debt market and address concentration risks, SEBI has implemented prudential regulations for open-ended mutual funds, especially debt funds. “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 added.

Barua said, “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. 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.”

Samar Banwat, Executive Director of the National Securities Depository Ltd, stated that, India is currently witnessing incredible progress and advancement fueled by innovation, entrepreneurship, and a robust economic structure. He informed, “Even young adults as young as 16 or 17 years old are venturing into startup ventures, showcasing their ability to bring their ideas to fruition. In this transformative era, mutual funds hold significant significance as they direct investments towards this emerging India, empowering individuals to actively partake in its exponential growth.”

Banwat stated that many investors in mutual funds already possess a Demat account but choose not to receive mutual funds in dematerialised form. He clarified that holding mutual fund units in a demat account offers several advantages. “Firstly, there is no need for an additional Know Your Customer (KYC) process since the depository participant has already completed it. Secondly, updating client information becomes easier as it only needs to be done at the demat account level, eliminating the need for multiple updates. Thirdly, nomination and transfer of assets become simpler when mutual funds are held in a demat account. By opting for a demat account to hold mutual funds, investors can benefit from a centralised process and have a single point of contact—the depository participant—for all matters related to their assets. This streamlines the investor experience and reduces the servicing requirements for Asset Management Companies (AMCs),” he added.

He elaborated, "The process of subscribing to online subscriptions is now simpler with the integration of demat account numbers. Moreover, mutual fund units held in a demat account can serve as collateral, allowing clients to pledge the units and obtain loans against them. This expands the digital loan journey for securities to encompass these units as well. Demat form units can also be utilised as collateral for trading through the marginless facility."

Banwat furthermore stated, “Mutual fund units in demat form are transferable, but maintaining a demat account may incur costs. Holding units in folio form is usually free. If an investor already has a demat account, there are no extra charges for holding mutual funds. Opening a demat account is quick and simple, and a Basic Services Demat Account (BSDA) has no fees for holdings within a specified limit. To seize opportunities and build a sustainable future, foster collaboration and embrace innovation.”

Adding to it, Lav Chaturvedi, the Chairman of the National Council on Capital Market & Investors Protection, ASSOCHAM, and the ED & CEO of Reliance Securities, expressed his optimistic view regarding India's flourishing young population of 1.4 billion. He highlighted the nation's promising future in terms of GDP and per capita income, underscoring the rapid progress that has been observed. Chaturvedi acknowledged the significant potential of the mutual fund industry and its crucial contribution to India's economic trajectory.