The Securities and Exchange Board of India (SEBI) announced a new framework for managing Passive Funds, Exchange Traded Funds (ETFs) and Index Funds amid the growing popularity of such funds as investment products for retail investors.
It has also allowed mutual funds to launch passively managed Equity-Linked Savings Schemes (ELSS) to save tax under Section 80C of the Income Tax Act.
Under the framework, 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.
New framework will come into effect on July 1
SEBI said the parameters of debt ETFs or Index Funds could be based on indices comprising corporate debt securities or Government Securities (G-Secs), T-bills and/or State Development Loans (SDLs) or a combination of corporate debt securities and G-secs, T-bills and SDLs. The new framework will come into effect from July 1 and will apply to all existing ETFs and Index Funds.
Weightage of the Securities
For an index weighing at least 80 per cent of corporate debt securities, a sole issuer should not have a weighting of more than 15 per cent in the index in respect of AAA securities, not more than 12.5 per cent in case of AA securities and not more than 10 per cent in case of A and below rated securities, it said.
In the case of a Hybrid Index – consisting of both corporate debt securities and G-Secs/SDLs – with a weighting of up to 80 per cent of corporate debt securities, a single issuer should not have more than 15 per cent weight in the index in respect of AAA-rated securities. However, the limit will be 15 per cent for AAA-rated securities of PSUs and AAA-rated securities of PFI (Public Financial Institution) issuers.
AMCs need to appoint at least two Market Makers
With regard to the norms of the Market Making (MMs) framework for ETFs, the SEBI said that Asset Management Companies (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. Such MMs are required to transact with the AMCs only in multiples of creation unit size.
No Exit-Load for transactions up to Rs 25 crore
Further, SEBI said that investors can directly approach the AMC for the redemption of units of the ETFs, for transactions up to Rs 25 crore without any exit load in case of certain scenarios.
Mutual Funds can be either actively managed ELSS or passively managed
It also said that the minimum subscription amount at the time of the new fund offer (NFO) for debt ETFs/Index Funds and other ETFs/Index Funds would be Rs 10 crore and Rs 5 crore, respectively. Meanwhile, the regulator said Mutual Funds can be either an actively managed ELSS scheme or a passively managed one, but not in both categories.
SEBI said in a circular that the passive ELSS scheme should be based on one of the indices comprising equity shares of the top 250 companies in terms of market capitalisation. The move will allow new fund houses which are exclusively focusing on passive schemes, to start a passively managed ELSS fund
