SEBI Issues Norms for Debt Index Funds, ETFs; Permits Mutual Funds To Roll Out Passive ELSS Schemes
Moneylife Digital Team 24 May 2022
Market regulator Securities and Exchange Board of India (SEBI) on Monday announced changes to guidelines  for passive mutual fund (MF) schemes, aiming to boost exchange-traded funds (ETFs).
Further, the market regulator notified that the index shall not have over 25% weight in a particular group, excluding securities issued by public sector units (PSUs), public financial institutions (PFIs) and public sector banks (PSBs). It shall also not have more than 25% weight in a particular sector, excluding G-Secs, T-bills, SDLs (state development loans) and AAA rated securities issued by PSUs, PFIs and PSBs. This norm, however, shall not apply to sectoral or thematic debt indices.
In the case of corporate debt ETFs/index funds, SEBI stated 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. At no point of time the securities of issuers not forming part of an index exceed 20% of the NAV of the ETF/ index fund, SEBI added.
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) to 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 Rs 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  by modifying the 'Categorisation and Rationalisation of Mutual Fund Schemes'. 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.
With passive funds becoming more and more popular in the equity segment, SEBI has issued new norms for passively-managed debt MF schemes. The new framework will come into effect from 1 July 2022 and will be applicable to all existing ETFs and index funds. The market regulator said that debt ETFs/ index funds could be based on indices comprising corporate debt securities; or government securities, T-bills and/or state development loans at issuer level. The constituents of the index should be reviewed at least on half-yearly basis and debt ETFs/index funds will have to replicate the underlying debt index.
It also 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 always. Further, the historical data with respect to constituents of the indices since inception of schemes shall also be disclosed on their website. Moreover, SEBI also issued 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 seven 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 28 December 2018 on “Creation of segregated portfolio in mutual fund schemes”. 
With the revision, investors can now put their money in passive tax-saving  schemes, to save taxes. The market regulator announced that AMCs can launch either of the following ELSS schemes in the open ended scheme category, subject to compliance with 'Guidelines on Equity Linked Saving Scheme, 2005,' notified by the ministry of finance.
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