Rising retail interest prompts new India ETF guidelines

The Securities and Exchange Board of India has introduced new guidelines for exchange traded funds and index funds, following a sharp rise in local investors’ interest in the products.

The recommendations, which also spell out norms for ETF market makers, investor education and awareness efforts, and disclosure guidelines, will take effect on July 1, and will apply to all existing ETFs and index funds.

Indian mutual fund leaders had been expecting regulators to adopt new rules for passive schemes following rising demand for a variety of offerings.

Passive equities and debt funds have been a big draw for high net worth individuals and retail investors over the past two to three years. The proportion of passive assets under management held by these individuals has risen from 5 per cent to 15 per cent during that time, Shiv Gupta, founder and chief executive of Sanctum Wealth, said at the recent Cafemutual passives conference.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Among the new recommendations, a single issuer shall have a weighting of no more than 15 per cent in any index for AAA-rated securities. Single issuers for AA and A-rated securities shall have no more than a 12.5 per cent and 10 per cent weighting, respectively.

Asset management firms “shall ensure that the updated constituents of the indices and methodology for all their debt ETFs/index funds are available on their respective websites at all points of time”, the circular states. “Further, the historical data with respect to constituents of the indices since inception of schemes shall also be disclosed on their website.”

The guidelines require fund shops to assign at least two market makers from the stock exchanges “for ETFs to provide continuous liquidity on the stock exchange platform”.

The SEBI also states that asset managers should allocate a defined proportion of daily net asset value on investor education and awareness campaigns.

The circular also states that ETFs and tracking funds’ tracking error should not rise above 2 per cent.

“In case of unavoidable circumstances in the nature of force majeure, which are beyond the control of the AMCs [asset management companies], the tracking error may exceed 2 per cent and the same shall be brought to the notice of trustees with corrective actions taken by the AMC, if any,” the circular notes.

Additionally, “all ETFs/index funds (including debt ETFs/index funds), shall disclose the tracking error based on past one year rolling data, on a daily basis, on the website of respective [asset manager] and [Association of Mutual Funds in India]”, the circular states.

SEBI laid out regulations for asset management companies that wanted to offer fixed-income ETFs at the end of 2019.

Last June, SEBI raised the investment limit for overseas exposure from a maximum of $200mn per manager to $300mn, keeping the industrywide cap to $1bn.

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