SEBI fine tunes framework for Debt ETFs/Index funds

At a time when passive funds are gaining popularity in the equity segment, the Securities and Exchange Board of India (SEBI) has laid down the framework for such funds in the debt arena. 

The capital market regulator has released the roadmap for exchange traded funds or index funds for debt securities with specific caps in terms of issuer or sector exposure limits and even the finer details for constitution of an index on which such schemes can be benchmarked. 

Here are the important aspects of the framework: 

1. Debt ETFs/Index funds could be based on indices comprising of corporate debt securities (corporate debt indices) or government securities, T-bills and/or state development loans. It could also be a combination of corporate debt securities and G-sec/T-bills/SDLs (Hybrid debt indices). 

2. Constituents of the index should have adequate liquidity and diversification (other than the portion of indices comprising of G-sec and/or SDLs) at issuer level. Further, 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. 

3. For an index with at least 80 per cent weightage of corporate debt securities, single issuer limit will be 15 per cent for AAA rated securities; 12.5 per cent for AA rated and 10 per cent for A and below rated securities. 

4. For a hybrid index with up to 80 per cent weightage of corporate debt securities, the limit for AAA rated securities of a single issuer has been set at 10 per cent though such securities by a PSU & PFI issuer can go up to 15 per cent. 

5. The index cannot have more than 25 per cent weightage in a particular group (excluding securities issued by PSUs, PFIs and Public Sector Banks. 

6. At no point of time the securities of issuers not forming part of an index exceed 20 per cent of the net asset value of the ETF/ Index fund. 

7. The exposure limit to a single issuer by the ETF/Index fund has been capped at 15 per cent of the portfolio for AAA rated securities and it has been fixed at 12.5 per cent and 10 per cent for AA rated securities and A & below rated securities, respectively. 

8. Any transactions undertaken in the scheme portfolio of ETF/Index fund in order to meet the redemption and subscription obligations has to be done while ensuring that post such transactions replication of the portfolio with the index is maintained at all points of time. 

SEBI has allowed mutual fund companies to appoint market makers but have directed them to ensure that the incentives, if any, are within the maximum permissible limit of Total Expense Ratio of the scheme.

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