SEBI working on ‘MF Lite’ for easier compliance for ETFs, other passive investments


SEBI News: The Securities and Exchange Board of India (SEBI) Chairperson, Madhabi Puri Buch, stated in the annual report that the capital market regulator has been gradually shifting towards a segmented approach to regulations. For accredited investors, for instance, SEBI has established a framework. This group of investors is much more skilled than normal investors and needs less regulatory protection. Products made available to these investors may be subject to only minimal regulation.

“Relaxations to the regulatory framework provided for Large Value Alternative Investment Funds is an example of such a segmented approach,” explained Madhabi Puri Buch in the report.

Buch said that not every investor in the market has the same level of risk aversion or return expectations . Moreover, not every investor is equally knowledgeable about the different investment options available on the securities market. In a similar vein, no issuer in the market has the same risk profile.

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“It is seen that having a ‘one size fits all’ approach to regulating securities markets causes market participants and investors to lose capital raising flexibility or investment flexibility and tends to increase the compliance requirements on issuers. This is because, in a ‘one size fits all’ approach, the compliance requirements would need to cater to the protection of interests of the least sophisticated investor, which is the small, retail investor, for perhaps the highest risk products,” added Buch.

According to Buch, the level of product sophistication is another variable that SEBI is taking into account before adopting a segmented strategy.

For instance, typical Mutual Fund schemes that raise funds from the public must go by a number of regulations. These Mutual Funds have strict standards, such as a high AMC net worth and an experienced investment team, because in conventional Mutual Funds, investment decisions are left up to the fund manager’s discretion and because millions of small investors rely on Mutual Funds for their investments.

If mutual funds only want to offer passive investment products, such as exchange-traded funds (ETFs) and index funds—where investment decisions are not discretionary but rather linked to changes in the underlying benchmark index—there is a case to be made for giving mutual funds a regulatory framework with fewer compliance requirements.

“SEBI is currently engaged with the Mutual Fund industry to introduce ‘MF Lite’ for such entities. We believe that greater adoption of such a segmented approach can facilitate development of the market and ease of doing business without compromising the basic tenets of investor protection and risk mitigation in the market ecosystem,” said the capital market regulator’s chairperson.

Also Read: Indian companies raised 9.8 lakh crore from capital markets in 2022-23: SEBI annual report

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Updated: 07 Aug 2023, 06:04 PM IST

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