Sebi lays down operating norms for debt index funds and ETFs

The Securities and Exchange Board of India has released new norms for passively-managed debt funds. ETMutualFunds had reported last week that these norms are in the pipeline. Sebi has said that Debt ETFs/ Index Funds could be based on indices comprising of Corporate Debt Securities; or Government Securities, t-bills and/or State Development Loans (SDLs) (G-sec indices); or a combination of all.

“The new circular by SEBI on passive funds has some fantastic changes that will drive further transparency, liquidity and innovation. In particular the regulations on debt passives are a big positive for this fast growing category,” said Radhika Gupta, CEO,

Mutual Fund.

According to the new norms, the constituents of the index in debt index funds should have adequate liquidity and diversification at issuer level. The constituents of the index shall be periodically reviewed also.

Sebi has also directed that the index shall not have more than 25% weight in a particular group(excluding securities issued by PSUs, Public Financial Institutions (PFIs) and Public Sector Banks (PSBs)). The index shall also not have more than 25% weight in a particular sector (excluding G-sec, t-bills, SDLs and AAA rated securities issued by PSUs, PFIs and PSBs). However, this provision shall not be applicable for sectoral or thematic debt indices.

Sebi has directed AMCs to ensure that the updated constituents of the indices and methodology for all their Debt ETFs/ Index Funds are available on their respective websites at all points of time. Further, the historical data with respect to constituents of the indices since inception of schemes shall also be disclosed on their website. To start with, AMFI has been directed to issue a list of debt indices for launching of debt ETFs/ Index Funds. The list shall be issued by AMFI within 1 month from the date of issuance of this circular.

In the case of Corporate Debt ETF/Index Funds, Sebi has said that investment in securities of issuers accounting for at least 60% of weight in the index, represents at least 80% of net asset value (NAV) of the ETF/ Index Fund. Sebi has added that at no point of time the securities of issuers not forming part of the index should exceed 20% of NAV of the ETF/ Index Fund.

Sebi has also laid down norms for rebalancing the portfolio of the ETF/ Index Fund:

a) In case of change in constituents of the index due to periodic review, the portfolio of ETF/ Index Funds be rebalanced within 7 calendar days.

b) In case the rating of any 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.

c) In case the rating of any security is downgraded to below investment grade, the said security may be segregated in accordance with SEBI Circular No.SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018 on “Creation of segregated portfolio in mutual fund schemes.