The Securities and Exchange Board of India (Sebi) has announced a new framework for the management of passive funds – exchange-traded funds (ETFs) and index funds – amid the growing popularity of these funds as an investment product for retail investors.
It also allowed mutual funds to launch passively managed equity-linked savings schemes (ELSS) to save taxes under Section 80C of the Income Tax Act.
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As part of this, Sebi has established standards for debt ETFs and index funds, its constitution, market making framework for ETFs, investor education and outreach fees, disclosure and disclosure guidelines. other provisions.
The total assets under management (AUM) of index funds, ETFs and funds of funds investing overseas was Rs 5.27 lakh crore in April.
The regulator said the standards for debt ETFs or index funds could be based on indices comprising corporate debt or government securities (G-sec), treasury bills and/or State Development Loans (SDLs) or a combination of corporate debt securities and G-secs, treasury bills and SDLs. The new framework will come into force on July 1 and will apply to all existing ETFs and index funds, he added.
For an index composed of at least 80% corporate debt securities, a single issuer should have no more than 15% weight in the index with respect to AAA securities, no more than 12.5% in in the case of AA securities and no more than 10% in the case of securities rated A and below, he said.
In the case of a hybrid index – comprising both corporate debt securities and G-sec/SDL – with up to 80% corporate debt weighting, a single issuer should not have more than 15% weighting in the index with respect to AAA-rated securities. However, for AAA-rated securities of PSUs and AAA-rated securities of IFP (public financial institution) issuers, the limit will be 15%.
In addition, for AA-rated securities, a single issuer should have no more than 8% weight in the index and no more than 6% for securities rated A and below. “For an index based on G-Sec and SDL, the single issuer limit will not apply,” Sebi said, adding that such an index should not have more than 25% weighting in any particular group. excluding securities issued by PSUs, PFIs and PSBs.
Regarding the standards of the market making framework for ETFs, Sebi said that asset management companies must appoint at least two market makers, who are members of stock exchanges, for ETFs to provide continuous liquidity. on the trading platform.