SEBI approves MF Lite for passive funds, new asset class for HNIs

At its 207th board meeting, SEBI approved a series of 17 reforms aimed at streamlining regulations and promoting growth in the capital markets. The measures cover market intermediaries, primary and secondary markets, mutual fund norms, alternative investments, debt and hybrid instruments, as well as surveillance and legal matters.

Despite earlier expectations regarding potential changes in the F&O segment, no decisions were taken during the Monday meeting, though public comments had been invited on a draft consultation paper earlier this year. These reforms align with SEBI’s broader strategy to foster a more efficient and transparent market environment.

A liberalised MF Lite framework for passive mutual fund schemes

The board approved the introduction of the Mutual Funds Lite (MF Lite) framework, which is aimed at passively managed schemes. This new framework relaxes requirements for sponsors, including criteria related to net worth, track record, profitability, and trustee responsibilities. It also simplifies the approval process and disclosure requirements.

The market regulator expects this framework to promote ease of entry, attract new players, reduce compliance burdens, enhance market liquidity, increase penetration, encourage investment diversification, and foster innovation in the mutual fund industry.

New asset class for HNIs

SEBI has introduced a new asset class aimed at high net-worth investors (HNIs), with a minimum investment of ₹10 lakh. The product, referred to as "Investment Strategies," offers greater flexibility and higher risk-taking potential compared to traditional mutual funds, while being professionally managed and well-regulated.

In July, the market regulator released a consultation paper on the introduction of a new asset class for bridging the gap between mutual funds and Portfolio Management  Services. 

Key safeguards for the asset class include restrictions on leverage, limits on investments in unlisted and unrated instruments, and derivatives exposure capped at 25% of assets under management (AUM) for purposes beyond hedging and rebalancing.

Rights issue timeline reduced from 317 days to just 23 days.

To streamline the rights issue process, the newly approved regulation will reduce the completion timeline from an average of 317 days to just 23 working days. This faster process, even quicker than the preferential allotment route, gives existing shareholders more opportunities to participate in the company’s growth. Key changes under the rights issue reforms include the removal of SEBI's observation requirement for the Draft Letter of Offer, optional merchant banker appointments, and simplified offer documents.

Additionally, stock exchanges and depositories will now handle application validation and allotment finalisation concurrently. Promoters can renounce their rights to specific investors, and issuers can allot under-subscribed portions accordingly, with mandatory disclosures. A monitoring agency will oversee the use of proceeds, and rights issues under ₹50 crore are now covered by SEBI’s Issue of Capital and Disclosure Requirements regulations.

T+0 settlement beta expanded to include 500 scrips

SEBI has expanded the scope of the optional T+0 settlement cycle, increasing the number of eligible scrips from 25 to the top 500 listed companies by market capitalisation. This enhancement follows a review of the Beta version’s performance and will be implemented in phases.

Norms for Investment Advisers (IAs) and Research Analysts (RAs) eased

With a review of the regulatory framework for IAs and RAs, SEBI will introduce relaxed eligibility criteria and simplified compliance requirements to facilitate ease of doing business for the intermediaries. The changes aim to encourage growth in the number of registered IAs and RAs to meet the rising demand from domestic investors.

Key updates include reducing the qualification requirement to a graduate degree in specified fields, removing the experience requirement, and eliminating the need for recurring base certifications. Compliance flexibility is also increased, allowing individuals to register as both IA and RA, operate part-time in related fields, and adjust fee structures. Additionally, corporatization thresholds have been relaxed, and the use of AI tools by IAs and RAs clarified, with the responsibility for services resting solely with the advisors.

Definition of 'Connected Person' under Insider Trading Rules expanded

SEBI has approved changes to broaden the definition of "connected person" under insider trading regulations. A connected person is defined as someone who either has access to unpublished price-sensitive information (UPSI) or is linked to such information through a relationship. The expanded scope now includes a firm or its partner or employee where a connected person is also a partner, and any person sharing a household or residence with a connected person.

In addition, the term "immediate relative" has been redefined to "relative," encompassing the spouse, parents, siblings, children, and their respective spouses. These amendments aim to improve the enforcement and investigation of insider trading without increasing disclosure requirements or affecting the existing Code of Conduct for designated persons and their immediate relatives.

New option to trade in the secondary market

SEBI has approved new options for investors to trade in the secondary market (cash segment), allowing them to use either a UPI block mechanism, similar to ASBA for secondary markets, or a 3-in-1 trading facility, in addition to the existing trading methods. Qualified Stock Brokers (QSBs) will be required to offer at least one of these two facilities to their clients.

Disclosure norms for Offshore Derivative Instruments (ODIs) tightened

To align the disclosure requirements for ODIs and segregated portfolios of Foreign Portfolio Investors (FPIs), SEBI has approved a series of reforms. This includes extending the additional disclosure framework introduced in August 2023 to ODI subscribers and equivalent structures. A compliance mechanism will require ODI-issuing FPIs to provide subscriber information and portfolio details to depositories and custodians.

Non-compliance will lead to the mandatory redemption of ODIs or liquidation of segregated portfolios within 180 days, with defaulting subscribers barred from holding further positions. Additionally, SEBI has prohibited ODI-issuing FPIs from using derivatives as underlying assets and from hedging ODIs with derivatives. Existing derivative-linked ODIs must be redeemed or fully hedged with cash positions within a year. Future ODIs, excluding those with government securities, must be issued under dedicated FPI registrations with no proprietary investments.