NSE incentives to boost ETFs

Inducements to be computed and settled on a monthly basis

The National Stock Exchange of India (NSE) has started incentives for market makers to boost liquidity in exchange-traded funds (ETFs) listed on it.

The exchange has started a liquidity enchancement scheme. The incentives will be computed and settled on a monthly basis. One condition is that participants should provide quotes within specified limits for 80 per cent of the trading time, for 80 per cent of the trading days in a month. The scheme began on September 15 and is open till March 31, 2016. (An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets. Unlike mutual funds, an ETF trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.)

For equity ETFs, participants get varying incentives, depending on the counterparty, according to the exchange. For liquid ETFs, the participants get a waiver on transaction charges on the entire traded volume in respect of ETFs, based on money market instruments for the particular month.

According to a BSE spokesperson, the exchange is currently not offering any incentives in the segment. On average, he said the BSE had a market share of 30 to 40 per cent in the ETF space.

The asset size of equity ETFs has doubled to Rs 6,295 crore from Rs 2,833 crore in the past 10 years.

The ETFs of Goldman Sachs MF are two-thirds of the assets. The assets of Gold ETFs have risen to Rs 6,243 crore from Rs 300 crore in 2007.

The incorrect perception about available liquidity of ETFs has deterred larger participants, said experts. "Limited awareness, higher push for structurally similar mutual funds, as well as low motivation for stock brokers to promote a non-churn product, are reasons for its low popularity," said Ravi Varanasi, chief, business development, NSE.

“Retail investors cannot be expected to drive liquidity in this segment. In India, Employees’ Provident Fund Organisation (EPFO) is the only institution which has started investing in this segment. For a vibrant market to develop, other private provident funds and institutions like the National Pension System need to come in,” said Manoj Nagpal, chief executive, Outlook Asia Capital.

According to sources, the mutual fund sector has also been urging the exchange to promote the ETF segment. Since April, at least 13 fund houses have filed offer documents for launching ETFs with market regulator Securities and Exchange Board of India.

This follows the Union labour ministry's decision in April to allow the EPFO to invest five to 15 per cent of its incremental corpus in equity-related instruments, in the form of ETFs.

“This is the best of the products in the passive fund management space. There's likely to be a fair amount of interest in this space, particularly from cost-conscious institutional investors, including companies and the EPFO,” said Dinesh Khara, managing director and chief executive, State Bank of India’s mutual fund.

THE GOODIES

• The National Stock Exchange has started a scheme that incentivises participation in exchange-traded funds (ETFs)
• The incentives will be computed and settled on a monthly basis
• Participants should provide quotes within specified limits for 80 per cent of the trading time for 80 per cent of the trading days in a month
• The scheme began on September 15 and is open till March 31, 2016
• For equity ETFs, participants get varying incentives depending on the counter-party