Sebi brings norms for debt ETFs, issuer to have less than 15% index weight

Under the norms to be adopted by all mutual fund houses, the index will have a minimum of eight issuers, rating of the constituents of the index will be investment grade

Markets regulator Sebi on Friday released norms for debt exchange traded funds (ETFs) wherein no single issuer will have more than 15 per cent weight in the index.

Under the norms to be adopted by all mutual fund houses, the index will have a minimum of eight issuers, rating of the constituents of the index will be investment grade and the constituents of the index will have a defined credit rating as well as maturity as specified in the methodology of the index, Sebi said in a circular.

In case, where the credit rating of an issuance falls below the investment grade or rating mandated in the index methodology, rebalancing by debt ETFs or index funds need to be done within a period of five working days.

With regard to replication method, the Securities and Exchange Board of India (Sebi) said ETFs or index funds will have to replicate the index completely.

In this method, fund managers need to replicate as close as possible each company's weight in the index.

In case this replication is not feasible due to non-availability of issuances of the issuer forming part of the index, Sebi said that the debt ETFs or index funds will be allowed to invest in other issuances issued by the same issuer having deviation of 10 per cent (positive and negative)from the weighted average duration of issuances forming part of the index, subject to single issuer limit.

Further, at aggregate portfolio level, the duration of debt ETF or index fund need not to deviate (plus/minus) 5 per cent from the duration of the index.

The rationale for any deviation need to be recorded.

In respect of compliance procedure, Sebi said that issuer of such debt ETF need to ensure compliance to these norms for rebalancing at the end of every calendar quarter. Besides, they will have to ensure that the updated constituents of the indices and methodology (for all its Debt ETFs/ Index Funds) are available on their its website at all points of time.

The issuers of all the existing debt ETFs are required to ensure adherence to the new norms within a period of three months.

All the debt ETFs, where Sebi has issued final observations on the scheme information document, but have not yet been launched and the issuers will have to submit the compliance status with respect to these norms to Sebi before launching such funds.

Sebi said that these norms will not be applicable to debt ETFs, tracking debt indices having constituents as government securities, treasury bills and tri-party repo.