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TMI BlogIntroduction of a Mutual Funds Lite (MF Lite) framework for passively managed schemes of Mutual FundsX X X X Extracts X X X X X X X X Extracts X X X X ..... ments, increase penetration, facilitate investment diversification, increase market liquidity and foster innovation. 2. In this regard, a Working Group was formed by SEBI to study and recommend a relaxed regime for passively managed MF schemes. The recommendations of the Working Group were deliberated in the Mutual Funds Advisory Committee (MFAC) and subsequent to that, SEBI (Mutual Funds) Regulations, 1996 ( MF Regulations ) was amended vide notification No. SEBI/LAD-NRO/GN/2024/221 dated December 16, 2024 . In view of the above, various provisions relating to MF Lite Framework are covered under the following paragraphs. 3. Categories of passive schemes to be covered under MF Lite framework i. Regulation 79(1)(b) of Chapter XI of the MF Regulation defines MF Lite as a mutual fund that is having only such index funds, exchange traded funds, fund of funds or other mutual fund schemes as may be specified by the Board from time to time. ii. As per Regulation 79(1)(d) of Chapter XI of the MF Regulation , MF Lite scheme is any scheme launched by an MF Lite or any other eligible passive scheme as may be specified by the Board from time to time. iii. In this regard, the passive schemes ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Chapter XI of MF Regulations on MF Lite Framework to launch only MF Lite schemes. A. Eligibility criteria for Sponsor of MF Lite i. Clause (iii) of the first proviso to Regulation 81 of Chapter XI of the MF Regulations inter alia states that, the sponsor shall appoint experienced personnel in the MF Lite asset management company such that the total combined experience of Chief Executive Officer, Chief Operating Officer, Chief Compliance Officer and Chief Investment Officer shall be at least twenty years. Further, as per clause (vi) of first proviso to Regulation 81 of Chapter XI of the MF Regulations , the sponsor shall ensure that other conditions in this regard as may be specified by the Board from time to time are adhered to. ii. Accordingly, it has been decided as under: a. In cases of both the main and alternate eligibility routes, AMCs may appoint a separate Chief Risk Officer (CRO) on a voluntary basis, otherwise the CCO may also act as the CRO of the AMC, subject to his/her eligibility and experience in risk management. B. Pooled Investment Vehicle as sponsor of Mutual Funds i. Second proviso to Regulation 81 of Chapter XI of the MF Regulations provides for a private equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Mutual Funds dated June 27, 2024 describes various provisions w.r.t Reduction of stake and disassociation of sponsor and shall also be applicable for AMCs registered under Chapter XI of MF Regulations on MF Lite Framework except sub- clause 1A.1.3.D (iii)(c). ii. For MF Lite Framework, in place of sub- clause 1A.1.3.D (iii)(c) of the Master Circular, the following shall be applicable: a. Net profit of the AMC after providing for depreciation, interest and tax in 3 out of immediately preceding 5 years including the fifth year; and average net annual profit after providing for depreciation, interest and tax during the immediately preceding 5 years should be at least INR 5 cr. D. Networth requirement for the MF Lite AMC i. Regulation 86(4) of Chapter XI of the MF Regulations inter alia states that if the total AUM of the MF Lite AMC exceeds a specified threshold, the MF Lite AMC shall abide by the net worth requirements under Chapter IV of the Regulations. ii. In this regard, it is decided that an MF Lite AMC shall abide by net worth requirements under Chapter IV of MF Regulations , as and when the total AUM of the MF Lite AMC exceeds INR 1 Lakh Cr. In such instances, the MF Lite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard, it has been decided as under: a. In case of change in control of the existing AMC due to acquisition of shares, the cost of acquisition may be funded out of borrowings by a sponsor but the sponsor shall have sufficient other assets to encumber for borrowings other than the shares of the proposed AMC. b. Minimum incremental capital contribution required in the AMC shall be funded only out of the net worth of the acquirer and not through borrowings. c. The sponsor s stake in an AMC shall be free from encumbrance in any form at all points of time. G. Norms for shareholding i. In terms of Regulation 82 (1) of Chapter XI of the MF Regulations , notwithstanding anything contained under regulation 7B of MF Regulations, a sponsor is permitted to obtain a registration as a mutual fund under Chapter II of MF Regulations and a separate registration as an MF Lite under Chapter XI of MF Regulations subject to conditions specified by the Board from time to time. Further, in terms of Regulation 82 (2) , an existing sponsor may transfer its passive schemes, which are eligible as MF Lite schemes, from an existing mutual fund to an MF Lite belonging to a group entity of the same sponsor, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Indian Registration Act, 1908 (16 of 1908), executed by the MF Lite AMC in favor of the trustees named in such an instrument. In this regard, AMFI in consultation with SEBI shall prescribe a standard trust deed, in line with roles and responsibilities of trustees as per Chapter XI of the MF Regulations and provisions mentioned under this circular. I. Roles and responsibilities of trustees i. Regulation 85 of Chapter XI of the MF Regulations specifies the rights and obligations of trustees inter alia pertaining to related party transactions, conflicts of interest, undue influence of sponsor, misselling, misconduct including market abuse/ misuse of information; including front running etc. In this regard, the trustees shall seek information from AMCs pertaining to the aforesaid issues. In case of any adverse observations with respect to the same, the trustee shall intimate SEBI regarding the same. ii. In terms of clause 1.1. (iv) of Annexure 1 of Master Circular for Mutual Funds dated June 27, 2024 , both the AMC and the trustees should mandatorily have separate Risk Management Committees (RMCs). In this regard it is decided that trustees of an MF Lite may not be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AMC and trustees of an MF Lite AMC shall be responsible for the core responsibilities mentioned at sub- clauses (c), (d), (e), (f) and (g) of clause 6.7A.4 of the Master Circular for Mutual Funds . b. The Board of AMC of an MF Lite AMC shall be responsible for the core responsibilities mentioned at sub- clauses (a) and (b) of clause 6.7A.4 of the Master Circular for Mutual Funds . iii. Further, certain common responsibilities, currently entrusted upon both trustees and AMCs, under the extant MF Regulations , such as the following, shall be applicable only to the Board of AMCs of an MF Lite. a. Periodic reporting to SEBI as required by MF Regulations and circulars issued there under. b. Overall risk management of all scheme specific and AMC specific risks. c. Filing of offer documents with SEBI and obtaining regulatory approvals. d. Ensuring adequacy of infrastructure and sufficient key personnel with adequate experience and qualification to undertake management of assets at all times. e. Appointment of key personnel including the chief investment officer, registrars and share transfer agents, compliance officer, auditor, custodian etc. and empanelment of brokers. f. Responsibil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMC Report (YAR) report to SEBI i. As per Regulation 87(34) of Chapter XI of the MF Regulations , the Board of MF Lite AMC shall furnish a report to the Board on a yearly basis. In this regard it is decided that the requirement of submission of Half Yearly Trustee Report (HYTR) to SEBI shall be discontinued. ii. Instead, the Board of MF Lite AMC shall furnish to SEBI an YAR on a yearly basis furnishing the similar details as that of the extant HYTR. Section 2 6. This section covers provisions relating to ease of compliance, relaxed disclosures and other regulatory requirements and shall be applicable to all passive schemes based on underlying indices those are permitted under clause 3 and clause 4 of this circular, irrespective of the AMC being registered under the MF Lite Framework or not. If passive schemes based on the aforesaid indices are already launched by the existing AMCs, the following proposals shall also be applicable to those passive schemes. A. Simplified Scheme Information Document SEBI had simplified and streamlined the Scheme Information Documents (SID) of mutual funds schemes as per paragraph 1.1 of the Master Circular for Mutual Funds dated June 27, 2024 . The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onths from the end of the 1st and 2nd halves of the financial year in which the schemes were launched, based on the relevant data and information as at the end of previous month. Further, SID needs to be updated within one month from the end of the half-year, based on the relevant data and information as at the end of September and March months respectively. In this regard, the SIDs for MF Lite schemes shall be updated within 2 months from the end of each financial year. ii. Portfolio Disclosure Paragraph 5.1 of the Master Circular for Mutual Funds dated June 27, 2024 specifies norms for portfolio disclosures of mutual fund schemes. In this regard, the following has been decided: I. Debt passive schemes shall disclose their scheme portfolio on a monthly basis within 10 days of every month. II. Hybrid passive schemes (please refer to clause 7(A) of this circular) shall disclose their scheme portfolio on a monthly basis within 10 days of every month. III. Equity passive schemes shall disclose their scheme portfolio within 10 days from the close of each quarter. IV. Separate portfolio disclosure of passive schemes on a half yearly basis shall be done away with. iii. Unaudited Half Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65%-80% and Debt 20%-35%) c. Debt oriented (Debt 65%-80% and Equity 20%-35%) iv. The AMCs shall be allowed to launch one ETF and one Index Fund for each category as mentioned at paragraph 7A (iii) above. v. The minimum subscription amount at the time of New Fund Offer (NFO) for Hybrid ETFs/ Index Funds shall be Rs. 10 Crore. vi. The ETF/ Index Fund shall evaluate and ensure compliance of the asset allocation of equity and debt for all its Hybrid ETFs/ Index Funds, at the end of every calendar quarter. vii. The provisions regarding composition of indices for debt ETFs / Index Funds as specified in paragraph 3.5 of the Master Circular for Mutual Funds , shall apply to the debt component of Hybrid ETFs / Index Funds also. Further, debt indices for this purpose shall be only constant duration indices as permitted under clause 3 of this circular. viii. The provisions regarding composition of indices for Equity ETFs / Index Funds under paragraph 3.4 of the Master Circular for Mutual Funds shall apply to the Equity Index component of Hybrid ETFs / Index Funds. ix. The underlying index to be tracked by such hybrid funds shall be the composition of an equity and a debt index from the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraph 3.5 of the Master Circular for MFs on Norms for Debt Exchange Traded Funds (ETFs)/Index Funds . However, the rating of the underlying instruments may go below AAA up to investment grade in case of such funds. 8. All other relevant provisions of the Master Circular for Mutual Funds dated June 27, 2024 , unless the context otherwise requires, or is contradictory to the provisions of this circular, shall apply to a MF Lite, MF Lite schemes, and trustees and AMCs in relation to such mutual funds and schemes. 9. The provisions of this circular shall come into effect from March 16, 2025. 10. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 and Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interest of investors in securities and to promote the development of, and to regulate the securities market. 11. This circular is available at www.sebi.gov.in under the link Legal Circulars . Yours faithfully, Lakshaya Chawla Deputy General Manager +91-22-26449369 [email protected] - Circular - Trade Notice - Public Notice - Instructions - O ..... 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