SEBI lays down framework for index funds for debt securities

At a time when passive funds are becoming more popular in the equity segment, the Securities and Exchange Board of India has laid down the framework for such funds in the debt arena.

The capital market regulators released a 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 the constitution of an index on which such schemes can be benchmarked.

Here are the important aspects of the framework:

Debt ETFs Index funds could be based on indices comprised of corporate debt securities corporate debt indices or government securities, T-bills and or state development loans. It could be a combination of corporate debt securities and G-sec T-bills SDLs Hybrid debt indices 2. The constituents of the index should have adequate liquidity and diversification other than the portion of indices consisting of G-sec and or SDLs at issuer level. The members of the index should be reviewed on a half-yearly basis, and debt ETFs Index funds have to replicate the underlying debt index.

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

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

The index can't have more than 25 per cent weightage in a group that excludes securities issued by PSUs, PFIs and Public Sector Banks.

At no point in time, the securities of issuers that are not part of an index exceed 20 per cent of the net asset value of the ETF Index fund.

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

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

The incentives that are allowed by SEBI are within the maximum permissible limit of the total expense ratio of the scheme, and have been directed by the spokesman for mutual fund companies to appoint market makers.