Do SEBI Norms for Debt ETFs Help Investors?

SEBI, the capital market regulator, has proposed new norms for passively-managed Debt Exchange Traded Funds (ETFs). According to these norms, Debt ETFs may be based on indices comprising corporate debt securities, treasury bills, government securities, state development loans or a combination of them. It aims to increase liquidity, transparency and innovation in the passive debt space. However, will SEBI norms for Debt ETFs make these investments popular among investors?

SEBI norms for Debt ETFs

According to SEBI norms for Debt ETFs, Asset Management Companies (AMCs) must ensure the index constituents are aggregated at the issuer level to determine investment limits for a single issuer, sector, group, etc. 

The index constituents for debt index funds must ensure adequate diversification and liquidity at the issuer level. Moreover, the index constituents must be periodically reviewed. 

In the case of Debt Index Funds and Corporate Debt ETFs, investment in issuers’ securities accounting for a minimum of 60% of weight in the index represents not less than 80% of the Funds Net Asset Value (NAV). Moreover, at no point in time must the securities of issuers which are not part of the index exceed 20% of the fund’s NAV. 

According to SEBI rules, the index must not have more than 25% weightage towards a particular group. However, securities issued by Public Sector Banks, Public Financial Institutions and PSUs are excluded from this rule. 

The index cannot have more than 25% weightage towards a particular sector. However, government securities, treasury bills, state development loans and AAA-rated securities that PSBs, PFIs and PSUs issue are exempted from this rule. 

SEBI has asked AMCs to make sure that updated indices constituents and their methodology for Debt ETFs and Debt Index Funds are available on their websites. Moreover, historical data with indices’ components since the schemes’ inception must be disclosed on the AMC’s websites. 

AMCs will have to issue a list of debt indices for launching Debt Index funds and Debt ETFs. The Association of Mutual Funds in India (AMFI) will issue the list within one month from the issuance date of the SEBI circular. 

Do SEBI norms help Debt ETF investors?

The SEBI circular ensures regulation in the passive debt space. As there are limits of 25% on sectoral allocation, group exposure levels and issuer level limits such as AAA, AA etc., investors enjoy risk mitigation in this space. 

For instance, Bharat Bond is a passive corporate bond fund which invests in AAA-rated securities of Public Sector Companies. It is a safe investment, and the SEBI circular doesn’t play a significant role in this fund. However, the new rules bring clarity for AMCs that are launching AA debt passive funds. 

SEBI has brought regulations around the tracking difference, with tolerance levels set at 1.25% for the passive debt space. Although there is some leeway on how the Debt ETFs and the Debt Index Funds replicate indices, SEBI rules ensure the fund doesn’t go haywire. It stays in line with the performance of the index it tracks. 

SEBI has ensured that investors in Debt ETFs enjoy transparency and liquidity. Moreover, SEBI has also introduced norms for rebalancing the portfolio of Debt Index Funds and Debt ETFs. In a nutshell, SEBI rules will draw more investors to the passive debt space.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in