Sebi sets operating standards for debt index funds and ETFs

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The Securities and Exchange Board of India has issued new standards for passively managed debt funds. ETMutualFunds had reported last week that these standards were in the works. Sebi said debt index ETFs/funds could be based on indices that include corporate debt securities; or government securities, treasury bills and/or government development loans (SDL) (G-sec indices); or a combination of all.

“SEBI’s new circular on passive funds has fantastic changes that will enhance transparency, liquidity and innovation. In particular, regulation on debt liabilities is a great benefit for this rapidly growing category,” said Radhika Gupta, CEO,

Mutual fund.

Under the new standards, index constituents of bond index funds must have adequate liquidity and diversification at the issuer level. The constituents of the index must also be revised periodically.

Sebi also ordered that the index have no more than 25% weighting in any particular group (excluding securities issued by PSUs, Public Financial Institutions (PFIs) and Public Sector Banks (PSBs) ). The index must also not have more than 25% weighting in any particular sector (excluding G-secs, t-bills, SDLs and AAA-rated securities issued by PSUs, PFIs and PSBs). However, this provision does not apply to sectoral or thematic debt indices.

Sebi asked the AMCs to ensure that updated indices and methodology components for all of their ETFs/debt index funds are available on their respective websites at all times. Additionally, historical data regarding the constituents of the indices since the inception of the systems must also be disclosed on their website. To begin with, AMFI was commissioned to publish a list of debt indices for the launch of debt ETFs/index funds. The list is issued by AMFI within one month from the date of issue of this circular.

In the case of corporate debt ETFs/index funds, Sebi stated that investments in securities of issuers representing at least 60% of the weight of the index represent at least 80% of the net asset value (NAV) of the ETF/index fund. . Sebi added that at no time should the securities of non-index issuers exceed 20% of the net asset value of the ETF/Index Fund.

Sebi has also established standards for rebalancing the ETF/Index Fund portfolio:

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

b) In the event that a security’s rating is downgraded below the rating prescribed in the index methodology (including downgrading below investment grade), the portfolio will be rebalanced within 30 days calendar.

c) In the event that the rating of a security is downgraded below investment grade, said security may be separated in accordance with SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018 on “Creating a Separate Portfolio in Mutual Fund Plans.

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