Sebi releases norms for debt ETFs, index funds — Details here

. Sebi said debt ETFs/index funds shall replicate the index completely.

The Securities and Exchange Board of India (Sebi) on Friday announced norms for debt exchange traded funds and index funds. The regulator has asked asset management companies to adopt norms for debt ETFs. These norms would require AMCs to have a minimum of eight issuers, no single issuer having more then 15% weight in the index and the rating of the constituents of index should be investment grade.

Market participants said these norms will bring more clarity in regard to debt ETFs and can attract investors in this segment. Sebi said debt ETFs/index funds shall replicate the index completely. But if the condition laid down above is not feasible due to non-availability of issuances of the issuer forming part of the index, the debt ETFs/index funds shall be allowed to invest in other issuances issued by the same issuer having deviation of +/- 10% from the weighted average duration of issuances forming part of the index, subject to single issuer limit.

“In an event where the credit rating of an issuance falls below the investment grade or rating mandated in the index methodology, rebalancing by debt ETFs/index funds shall be done within a period of five working days,” said Sebi in a circular.

Market participants were awaiting clarity on this issue because once debt papers fall below the investment grade, they become illiquid and fund houses would find it difficult to sell their papers.

“There needs to clarity, whether fund houses should take investments on their book or mark down the investments, which might lower the returns,” said a debt fund manager of a leading fund house. Sebi also said issuers of all the existing debt ETFs/index funds are required to ensure adherence to the new norms within a period of three months from the date of issuance of this circular. However, the norms shall not be applicable to debt ETFs/index funds tracking debt indices having constituents such as government securities, treasury bills and tri-party repo only.