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SEBI reviews Framework for Debt ETFs and Index Funds; Introduces Passive ELSS Scheme Category for MFs

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SEBI tweaks norms to boost liquidity

The Securities and Exchange Board of India (SEBI) reviewed the regulatory framework for passive funds i.e. Exchange-traded funds (ETFs), and Index Funds through a Working Group (WG) amid growing popularity of such funds as an investment product for retail investors.

Now, on the recommendations of the WG, SEBI has laid down norms for debt ETFs and index funds, its constitution, market making framework for ETFs, investor education and awareness charges, disclosure guidelines and other provisions. These will come into effect from July 1, 2022.

  • Notably, the total Assets Under Management (AUM) of index funds, ETFs and fund of funds investing overseas were Rs 5.27 lakh crore as of April, 2022.

Key Norms under the Framework:

i.Debt ETFs or Index Funds could be based on indices comprising corporate debt securities or government securities (G-sec), T-bills (Treasury Bills) and/or state development loans (SDLs). It could also be a combination of corporate debt securities and G-sec/T-bills/SDLs (Hybrid debt indices).

ii.In order to enhance liquidity in units of ETFs on the stock exchange platform, SEBI has decided that direct transaction with AMCs (asset management company) will be allowed for Rs 25 crore and above.

ii.Investors can also directly approach the AMC for redemption of units of ETFs above Rs 25 crore without any exit load, in case of certain scenarios.

iii.It also said that the minimum subscription amount at the time of new fund offer (NFO) for debt ETFs/index funds will be Rs 10 crore, and other ETFs/index funds will be Rs 5 crore.

iv.AMCs have to redeem the units if total bid size on the exchange is less than half of creation units size daily, averaged for seven consecutive trading days

v.AMCs need to appoint at least two market makers (MMs), who are members of the stock exchanges, for ETFs to provide continuous liquidity on the exchange platform.

vi.For an index with at least 80% weightage of corporate debt securities, single issuer limit will be 15% for AAA rated securities; 12.5% for AA rated and 10% for A and below rated securities.

vii.For a hybrid index with up to 80% weightage of corporate debt securities, the limit for AAA rated securities of a single issuer has been set at 10% though such securities by a PSU & PFI issuer can go up to 15%. 

viii.The index cannot have more than 25% weightage in a particular group (excluding securities issued by PSUs, PFIs and Public Sector Banks). 

ix.At no point of time the securities of issuers not forming part of an index exceed 20% of the net asset value of the ETF/ Index fund. 

SEBI introduces a New Passive ELSS scheme category 

SEBI also allowed Mutual Funds (MFs) to launch Equity-Linked Savings Schemes (ELSS) to save taxes under Section 80C of the Income-tax Act, 1961. ELSS will be passively-managed funds based on an index that comprises top 250 companies in terms of market capitalization.

  • However, a fund house can either have an active or a passive ELSS, but not both. 

Click Here for Official Notification 

Recent Related News:

i.SEBI has amended the rules regarding investment aspects of Category III of alternative investment funds (AIFs). The new norms will be called as ‘SEBI’s AIF Regulations, 2022’ w.e.f. March 16, 2022. Category III AIFs* trade with a view to make short term returns.

ii.SEBI has reconstituted its Alternative Investment Policy Advisory Committee (AIPAC), which has now 20 members and will be chaired by Infosys co-founder Nagavara Ramarao (NR) Narayana Murthy.

About Securities and Exchange Board of India (SEBI):

Chairperson– Madhabi Puri Buch
Headquarters– Mumbai, Maharashtra