India to ease capital, disclosure rules for passive funds – sources

By Jayshree P Upadhyay

(Reuters) – India’s markets regulator plans to lower capital and disclosure requirements for fund houses that run passive investment schemes, according to three sources with direct knowledge of the matter.

Proposed new rules would also allow existing fund houses to hive off their passive investment schemes into separate entities to take advantage of the looser regulation, these people said.

The Securities and Exchange Board of India (SEBI) will seek public comments on the proposals before finalising the rules, the sources said, declining to be identified as they are not authorised to speak to the media.

SEBI did not respond to an email from Reuters.

The regulator first flagged the prospect of lighter regulations for passive funds in its annual report in August. The details of those proposals have not been previously reported.

Assets under management of passive funds surged sevenfold to 7.9 trillion rupees between July 2019 and September 2023 and now account for 17% of the total industry.

Passive funds replicate indexes, leaving less discretion for fund managers.

SEBI plans to reduce the capital requirement for passive only fund houses to about 100 million rupees from 500 million rupees currently, the sources said.

The regulator will also prescribe more liberal disclosure rules for such fund houses.

Instead of the current requirement of providing portfolio disclosures every two weeks or every month, passive only fund houses will need to declare that they are following a particular index every six months, two of the three sources said.

Rules around maintaining call records of fund managers, currently required for all fund houses, may also be eased for passive only funds, they said.

“With the lighter touch regulations, global players such as Vanguard, State Street SPDRs, and others who have a core focus and expertise only in passive funds, can become more keen to set up business in India and launch a passive only fund houses under this proposed light touch regulations,” said Anil Ghelani, head of passive investments and products at DSP Asset Managers, an Indian asset management firm.

In July, Blackrock, the world’s largest money manager tied up with Mukesh Ambani’s Jio Financial Services to launch a fund house in India but others like Vanguard are yet to enter the Indian market.

SEBI could also relax rules to remove caps on passive funds’ exposures to individual stocks, said the sources.

Existing rules say that no fund house can invest more than 25% of its assets in a group of connected entities. A fund can also not hold more than 10% of the company’s paid-up capital.

(Reporting by Jayshree P Upadhyay. Editing by Sam Holmes)