New SEBI Norms: No single issuer to have over 15% weights in debt ETFs

New SEBI Norms: No single issuer to have over 15% weights in debt ETFs

The market regulator Securities and Exchange Board of India (SEBI) recently had released norms for debt exchange-traded funds (ETFs) and index funds. The regulator had asked the asset management companies in order to adopt norms for debt ETFs. These norms shall require asset management companies to have a minimum of 8 issuers, no single issuer having more than 15% weight in the index as well as the rating of the constituents of the index must be investment grade.

SEBI has stated in a circular that as per the norms that is required to be adopted by all mutual fund houses, the index would have a minimum of 8 issuers, rating of the constituents of the index would be investment grade as well as the constituents of the index shall have a clear credit rating along with maturity as stated in the methodology of the index.

In case when the credit rating of an issuance falls under the grade of investment or rating commanded in the index methodology, rebalancing by means of debt exchange-traded funds (ETFs) or index funds are required to be done in a period of 5 working days.

Relating to the replication method, the Securities and Exchange Board of India (Sebi) has stated that ETFs or index funds shall have to replicate the index entirely. In this method, fund managers must also replicate as close as possible each corporation's weight in the index.

If this replication is not possible owing to non-availability of issuances of the issuer forming part of the index, the Securities and Exchange Board of India (SEBI) stated that the debt ETFs or index funds would be permitted to invest in other issuances issued by means of the same issuer having deviation of 10% (positive and negative) from the weighted average duration of issuances creating part of the index, subjected towards single issuer limit.

Furthermore, at the aggregate portfolio level, the period of debt ETF or index fund are required not towards deviating (plus/minus) 5% from the duration of the index.

Also, the rationale for any deviation needs to be recorded.

SEBI also stated that with regard to compliance procedure, the issuer of such debt ETF is required to ensure compliance with these norms for rebalancing at the end of each calendar quarter. Moreover, they shall have to make certain that the updated constituents of the indices as well as methodology (for all its Debt ETFs/ Index Funds) are available on their website all the time.

The issuers of all the prevailing debt ETFs must also ensure the adherence towards the new norms within a period of 3 months.

All the debt exchange-traded funds (ETFs), in which SEBI had issued final opinions on the scheme information document, but it was not yet launched and the issuers would have to submit the compliance status pertaining to these norms towards SEBI before launching such funds.

SEBI held that these norms would not be applicable towards debt ETFs, tracking debt indices having constituents as government securities, treasury bills as well as tri-party repo.


The market regulator said that these norms would bring more precision relating to debt ETFs and could attract investors in this segment. There is a much required to clarity, whether fund houses shall take investments on their book or mark down the investments, which may lower the returns.

What are ETFs?

Exchange-Traded Funds are basically Index Funds that are listed and traded on exchanges like stocks. Till the development of ETFs, this was not thinkable before. Worldwide, ETFs have released a whole new prospect of investment opportunities towards Retail as well as Institutional Money Managers. They allow investors to gain wide-ranging exposure to entire stock markets in diverse Nations and particular sectors with relative ease, on a real-time basis as well as at a lower cost than many other forms of investing.

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eStartIndia Team

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