Sebi Bars Fund Houses From Launching Passively Managed Funds. See Details Here

The Securities and Exchange Board of India (Sebi) has barred fund houses from launching passively managed funds based on feedback from stakeholders. The decision comes following its earlier decision permitting the launch of either an actively managed equity-linked savings scheme (ELSS) or a passively managed ELSS scheme in the open-ended category.

Outlook Money has the letter sent by Sebi to the mutual fund industry body, the Association of Mutual Funds in India (AMFI), in this regard. In a circular on January 10, 2023, Sebi stated that with reference to the circular on the development of passive funds dated May 23, 2022, which allowed mutual funds to launch either an actively-managed ELSS scheme or a passively-managed ELSS scheme in an open-ended scheme category, subject to compliance with guidelines on ELSS, 2005.

Sebi has notified that based on the feedback received from the stakeholders, it has now been decided that mutual funds which have actively managed open-ended ELSS schemes may launch passively-managed open-ended ELSS plans after stopping new inflows/subscriptions to the existing actively-managed open-ended ELSS schemes.

As per the circular, the procedure states that mutual fund houses must stop all fresh inflows and subscriptions to the actively-managed ELSS scheme after a written communication about the proposed change along with reasons and benefits of such change is sent to each unitholder, and an advertisement is published in at least one English daily newspaper with nationwide circulation and in at least one newspaper published in the regional language where the mutual fund’s head office of is situated.

It further states that the disclosure in the letter should highlight “the fresh inflows/ subscriptions, including the systematic investment plans (SIPs) and systematic transfer plans (STPs) for the existing actively managed open-ended ELSS scheme would be stopped from dd/mm/yyyy due to the proposed launch of passively managed open-ended ELSS scheme. The unitholders of the actively managed open-ended ELSS scheme, for which fresh inflows/subscriptions would cease, shall be able to redeem their units, subject to lock-in, if any.”

Additionally, it said that mutual funds can launch passively managed open-ended ELSS schemes subject to filing the Scheme Information Document with Sebi under Regulation 28 of SEBI (Mutual Fund) Regulations 1996 and receiving a final observation letter.

Further, after completing three years from the date of stopping all inflows in the actively managed ELSS scheme, the AMC is required to make proper disclosures about clause ISA of regulation 18 of SEBI (Mutual Funds) Regulations, 1996, for the merger of the two ELSS schemes subject to obtaining necessary approvals from SEBI.

“The exit option as required under sub-clause (ii) of clause 15A of regulation 18 shall specifically inform the investor that in case the investor doesn’t exit the scheme, the investments would be managed through passively managed open-ended ELSS scheme,” as per the circular.