Capital market regulator SEBI on Monday allowed mutual funds to launch a passively operated equity-linked savings scheme (ELSS).
However, the regulator states that mutual funds may have an actively-managed ELSS scheme or a passively managed one, but not in both categories.
The passive ELSS scheme should be based on an index consisting of equity shares of the top 250 companies in terms of market capitalization, SEBI said in a circular. The move would allow new fund houses to focus exclusively on passive schemes to raise a passive-managed ELSS fund.
In addition, amid the growing popularity of such funds as investment products for retail investors, SEBI has created a framework for managing passive funds – exchange traded funds (ETFs) and index funds.
The new structure will take effect on July 1 and will apply to all existing ETFs and index funds, SEBI said.
Under the framework, the regulator sets guidelines for debt ETFs and index funds, its structure, market-making structure for ETFs, investor education and awareness charges, disclosure guidelines and other provisions.
“Considering the rise of passive funds – ETFs and index funds as an investment product for retail investors worldwide and the various benefits of passive investments such as transparency, diversity, low cost…, it was felt necessary to review the regulatory framework for passive funds in India,” Sebi said.
In this regard, a working group was formed representing various stakeholders in the domain of passive funds such as AMC, Mutual Fund Trustee and Stock Broker.
The group’s recommendations and feedback from the industry were discussed in the Mutual Fund Advisory Committee, and after considering the committee’s recommendations, SEBI came up with a new structure on passive funds.
SEBI said that the rules for loan ETF or index fund may be based on a combination of corporate debt securities or government securities (G-Sec), T-bill and / or state development loan (SDL) or corporate debt securities and G. Second / T-Bill / SDL.
For an index with a minimum weight of 80 percent of corporate debt securities, the index should not weigh more than 15 percent in the case of AAA securities of a single issuer, not more than 12.5 percent in the case of AA securities and no more. More than 10 per cent for A and below rated securities.
In the case of a hybrid index consisting of both corporate loan securities and G-Sec / SDL – with a weight of up to 80 percent of corporate loan securities, the index should not weigh more than 15 percent in the case of a single issuer’s AAA. -Rated securities. However, PSU’s AAA-rated securities and PFI (Public Financial Institution) issuers will have a limit of 15 percent on AAA-rated securities.
Further, in the case of AA-rated securities, the index of a single issuer should not weigh more than 8 per cent and in the case of rated securities A and below, it should not exceed 6 per cent.
“For an index based on G-Sec and SDL, the single issuer limit will not apply,” SEBI said, adding that the weight of such index should not exceed 25 per cent in a particular group, excluding securities issued by the public sector unit. (PSUs), (PFIs) and Public Sector Banks (PSBs).
Regarding the rules for the market building framework for ETFs, SEBI states that asset management companies (AMCs) must provide at least two market makers (MMs) who are members of the stock exchange, continuously providing liquidity on the exchange platform for ETFs. Such MMs only need to deal with AMC in multiples of the creation unit size.
AMCs need to have an approved policy on market creation in ETFs based on the market creation framework provided by the regulator. Also, they need to facilitate the creation and redemption of ETF units including loan ETFs by MMs based on their best efforts.
In the case of investor education and awareness charges, SEBI states that the charges applicable for investor education and awareness initiatives from ETFs or index funds should be 1 bps of the scheme’s daily net assets.
“By investing more than 80 per cent of its NAV (net asset value) in the underlying domestic fund, investors will not need to set aside 2 bps of daily net assets for education and awareness initiatives,” Sebi said.
In order to increase liquidity in ETF units on the stock exchange platform, it has been decided that direct transactions with AMC only need to be facilitated for investors to transact above a certain threshold.
In this regard, to start with any order placed directly with AMC for redemption or subscription must be more than Rs 25 crore and such threshold will not be applicable for MM and should be reviewed periodically.
Further, SEBI said that under certain circumstances, investors can go directly to AMC for redemption of ETF units for transactions up to Rs 25 crore without any exit load.
SEBI has stated that the minimum subscription amount of New Fund Offer (NFO) for Debt ETF / Index Fund and other ETF / Index Funds will be Rs. 10 crore and Rs. 5 crore respectively.
In order to get proper understanding and clarity for the investors, the name of the underlying index or product will be included in the naming of the ETF or index fund. Further, for ETFs, after listing the units, the scrip code of such ETFs will be published in the naming everywhere.