TMI BlogCircular on Development of Passive FundsX X X X Extracts X X X X X X X X Extracts X X X X ..... tions, Industry Expert, etc. 2. The recommendations of the Working Group and the feedback received from the industry were deliberated in the Mutual Funds Advisory Committee (MFAC). Considering the recommendations of MFAC, the following have been decided: I. Norms for Debt Exchange Traded Funds (Debt ETFs)/ Index Funds Debt ETFs/ Index Funds could be based on indices comprising of (a) Corporate Debt Securities (Corporate debt indices); or (b) Government Securities (G-sec), t-bills and/or State Development Loans (SDLs) (G-sec indices); or (c) A combination of Corporate Debt Securities and G-sec/t-bills/SDLs (Hybrid debt indices). The detailed provisions in this regard are given below: A. Debt ETFs/ Index Funds: Index Constitution For Debt ETFs/ Index Funds, the AMCs shall ensure the following: i. Constituents of the index are aggregated at issuer level for the purpose of determining investment limits for single issuer, group, sector, etc. ii. Constituents of the index shall have a defined credit rating and defined maturity and the same shall be specified in the index methodology. iii. Rating of the constituents of the index shall be of investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indices and methodology for all their Debt ETFs/ Index Funds are available on their respective websites at all points of time. Further, the historical data with respect to constituents of the indices since inception of schemes shall also be disclosed on their website. xi. To start with, AMFI shall issue a list of debt indices for launching of debt ETFs/ Index Funds. The list shall be issued by AMFI within 1 month from the date of issuance of this circular. B. Corporate Debt ETF/Index Funds: Debt ETFs/ Index Funds based on Index of Corporate Debt Securities Debt ETFs/ Index Funds based on index comprising of only corporate debt securities shall be considered to be replicating the underlying debt index provided: i. Investment in securities of issuers accounting for at least 60% of weight in the index, represents at least 80% of net asset value (NAV) of the ETF/ Index Fund. ii. At no point of time the securities of issuers not forming part of the index exceed 20% of NAV of the ETF/ Index Fund. iii. At least 8 issuers from the underlying index form part of the portfolio of the ETF/ Index Fund. iv. The investment in various securities are aggregated at issuer lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the portfolio of ETF/ Index Funds be rebalanced within 7 calendar days. b) In case the rating of any security is downgraded to below the rating mandated in the index methodology (including downgrade to below investment grade), the portfolio be rebalanced within 30 calendar days. c) In case the rating of any security is downgraded to below investment grade, the said security may be segregated in accordance with SEBI Circular No.SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018 on Creation of segregated portfolio in mutual fund schemes . C. G-sec ETF/Index Fund: Debt ETFs/ Index Funds based on G-sec, t-bills and SDLs G-sec ETFs/ Index Funds shall be considered to be replicating the underlying index, provided: i. The duration of the portfolio of ETF/ Index Fund replicates the duration of the underlying index within a maximum permissible deviation of +/- 10%. ii. ETFs/Index Funds replicating a Constant Maturity index may invest in securities with residual maturity within +/- 10% of maturity range of the index. iii. In case of Target Maturity (or Target Date) ETFs/ Index Funds, the following norms for permissible deviation in duration shall apply: a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ETFs/ Index Funds issued vide SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2019/147 dated November 29, 2019 shall be rescinded with effect from the date of implementation of this circular. II. Norms for Market Making Framework for ETFs A . AMC shall appoint at least two Market Makers (MMs), who are members of the Stock Exchanges, for ETFs to provide continuous liquidity on the stock exchange platform. MM shall transact with AMC only in multiples of creation unit size. B . The AMC shall have an approved policy regarding market making in ETFs based on the framework for market making as provided at Annexure A. C . AMCs shall facilitate in-kind creation and redemption of units of ETFs (including Debt ETFs) by MMs on a best effort basis. D . Incentive for MMs i. Incentives, if any, to MMs shall be charged to the scheme within the maximum permissible limit of TER. ii. A transparent incentive structure for the MMs shall be put in place, and the incentives shall, inter alia, be linked to performance of the MMs in terms of generating liquidity in units of ETFs. The relevant data regarding trading volume, bid-ask spread in units of ETFs, and such other information a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n place to enable the netting mechanism. vi. The AMC shall ensure that at no point of time, the above mechanism shall increase the risk of the ETF. III. Investor Education and Awareness Charges A . In partial modification to paragraph F of SEBI Circular No.CIR/IMD/DF/21/2012 dated September 13, 2012 , the following have been decided: i. The charges applicable for investor education and awareness initiatives from ETFs/ Index Funds shall be 1bps of daily net assets of the scheme. ii. Fund of Funds (FoFs) investing more than 80% of its NAV in the underlying domestic funds shall not be required to set aside 2bps of the daily net assets towards investor education and awareness initiatives. B . AMCs and AMFI shall carry out focused investor education and awareness initiatives for passive funds. IV. Direct transaction in ETFs through AMCs A . In order to enhance liquidity in units of ETFs on stock exchange platform, it has been decided that direct transaction with AMCs shall be facilitated for investors only for transactions above a specified threshold. In this regard, to begin with any order placed for redemption or subscription directly with the AMC must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds is higher than 1.25%, the same shall be brought to the notice of trustees with corrective actions taken by the AMC, if any. C . In view of the above, paragraph 9 of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2021/668 dated November 24, 2021 , stands modified. VI. Valuation by Fund of Funds (FoFs) investing in ETFs A . The closing price of the units of ETFs on Stock Exchange shall be used for valuation by FoFs investing in such ETFs. VII. Disclosure of indicative Net Asset Value (iNAV) A . iNAV of an ETF i.e. the per unit NAV based on the current market value of its portfolio during the trading hours of the ETF, shall be disclosed on a continuous basis on the Stock Exchange(s), where the units of these ETFs are listed and traded and shall be updated in the following manner: i. For Equity ETFs, within a maximum time lag of 15 seconds from underlying market. ii. For Debt ETFs, at least four times a day i.e. opening and closing iNAV and at least two times during the intervening period with minimum time lag of 90 minutes between the two disclosures. iii. For ETFs on Gold or Silver, based on the latest available data for Gold or Silver. Accordingly, iNAV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Change in constituents of the index, if any, shall be disclosed on the AMC website on the day of change. XI. Other Provisions A. Minimum subscription amount during New Fund Offer (NFO) i. In partial modification to paragraph 2(a) of SEBI Circular No.Cir/ IMD/DF/15/2014 dated June 20, 2014 , it has been decided that the minimum subscription amount at the time of New Fund Offer (NFO) for Debt ETFs/ Index Funds and other ETFs/ Index Funds shall be INR 10 Cr. and INR 5 Cr. respectively. ii. Alternative to launch of NFO for ETFs, the AMC may contribute the initial fund for unit creation. Subsequently, the AMC can transfer the units of such ETFs to MMs or other investors, subject to compliance with all applicable provisions for launch of ETFs. B. Equity Linked Saving Scheme (ELSS) in Passive Fund Category In partial modification to Clause III (a) of SEBI Circular No.SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017 on Categorization and Rationalization of Mutual Fund Schemes , it has been decided that mutual funds can launch either of the following ELSS scheme in open ended Scheme Category, subject to compliance with guidelines on Equity Linked Saving Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X
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