Sebi allows active to passive ELSS switch for asset management companies

But regulator says AMCs must shut existing active scheme before offering a passive one

The Securities and Exchange Board of India (Sebi) has allowed asset management companies (AMCs) that have actively-managed equity linked savings schemes (ELSS) to launch a passive ELSS. But the AMCs can do so only after they close the existing active scheme.
 

This comes at the beginning of the most critical quarter for ELSS schemes, which are used by investors to avail themselves of tax deductions. Passive schemes have been stealing a march over active schemes lately thanks to their relatively lower costs and better performance.

Illustration: Binay Sinha

 

Sebi on Tuesday wrote to the Association of Mutual Funds in India (Amfi) clarifying that AMCs that already had active ELSS schemes could launch passive ones after stopping fresh inflows to their active offerings.
 

“Based on feedback received from stakeholders, it has now been decided that mutual funds having existing actively managed open-ended ELSS scheme may launch passively managed open-ended ELSS schemes after stopping fresh inflows/subscriptions to existing actively managed open-ended ELSS scheme,” Sebi said in a letter to the MF industry.
 

According to the letter, active schemes can be stopped after sending a written communication to unit holders. The scheme will have to be kept open for redemptions. After three years, when the lock-in for all investors would be over, the AMC can merge the active ELSS scheme with their passive ELSS.

 

Industry players believe Sebi’s move might not prompt fund houses to switch from active to passive.
 

Top MF executives say they do not see merit in shutting existing active ELSS schemes with sizable assets under management (AUM) to start afresh in the passive space. The only beneficiaries, according to them, are passive-focused fund houses that are stuck with active ELSS by way of acquisition.
 

“I don’t think any AMC would want to shut down a scheme that already has good AUM. As a fund house, we anyway believe that active ELSS has a lot of potential to generate alpha, given the three-year lock-in and flexibility to invest across market caps,” said a senior AMC executive.
 

“Passive-focused AMCs that have active ELSS by way of acquisition are the only ones that may look to shut the active scheme and launch a passive ELSS,” he added.
 

Navi MF is one such AMC. The passive-focused fund house has an active ELSS from its acquisition of Essel MF.

Until recently, only active schemes qualified for the ELSS tag. Last year, the market regulator revamped the framework, allowing AMCs to launch ELSS based on exchange-traded funds (ETFs).
 

Another AMC executive said ELSS as a category has lost sheen with the introduction of the new income tax regime that does not allow deductions.
 

“I think we will continue with active. The ELSS as a category is not as attractive right now as it used to be. The flows are now much lower. Hence, there’s no point in experimenting,” he said.
 

Three other fund houses also ruled out the possibility of shutting their active ELSS for a passive one.
 

In May 2022, Sebi introduced the passive ELSS category, but imposed the condition that AMCs could offer only one kind of ELSS — active or passive. As most AMCs already had an active ELSS, only a few had the option of launching passive schemes. Now that Sebi has prescribed clear rules for shutting active schemes, the option to launch a passive ELSS is open to all AMCs.
 

At present, there is only one passive ELSS fund by IIFL MF, which tracks the Nifty50 index.