Sebi issues new norms for constitution, disclosure of passive funds

Exchange-traded funds group-level exposure will be capped at 25 per cent, says regulator.

The Securities and Exchange Board of India (Sebi) on Monday announced changes to guidelines for passive funds, aiming to boost exchange-traded funds (ETFs).

For debt ETFs and index funds, the market regulator capped group-level exposure at 25 per cent. The cap will not apply when it comes to investment in public sector entities.

The constituents of the index will be aggregated at issuer level for the purpose of determining investment limits for single issuer, group or a sector.

Sebi asked the Association of Mutual Funds in India (Amfi) shall issue a list of debt indices for launching of debt ETFs within a month.

In case of change in constituents of the index due to periodic review, the portfolio of ETF or index funds will be rebalanced within seven calendar days.

If the rating of a security is downgraded to below the rating mandated in the index methodology (including downgrade to below investment grade), the portfolio be rebalanced within 30 calendar days.

Sebi said asset management companies (AMC) shall appoint at least two market makers (MMs) for ETFs to provide continuous liquidity on the stock exchange platform.

Sebi has managed that direct transactions with AMCs shall be facilitated for investors for transactions above a specified threshold.

“In this regard, to begin with any order placed for redemption or subscription directly with the AMC must be of greater than ~25 crore. The aforesaid threshold shall not be applicable for MMs and shall be periodically reviewed,” said Sebi.

Sebi has also allowed AMCs to launch passive equity-linked saving schemes (ELSS) through an index fund. The investment universe of such schemes will be restricted to top 250 companies by market cap. However, fund houses will launch either a passive or an active ELSS scheme and not both.