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| Capitalstars Investment Advisor |
Market regulator Securities and Exchange Board of India has come up with rules for exchanged-traded debt funds and index funds.
The guidelines come ahead of the proposed issue of the first debt ETF, to be managed by Edelweiss Asset Management and which will cater to the borrowing needs of public sector enterprises.
Former finance minister Arun Jaitley had in his 2018-19 budget speech first announced the plan for debt ETF, as part of the government's efforts to enhance depth in the bond market and draw retail investors to debt products.
In a circular to asset management companies, Sebi said the index created for debt ETF must have a minimum of eight companies with no single issuer having more than 15% weight. All the constituents of the index must be investment grade as well as have a defined credit rating and defined maturity.
Any new debt ETF that is launched should replicate the index completely. If this is not feasible due to the non-availability of securities issued by index constituents, the ETF would be allowed to invest in other debt issues with a deviation of plus or minus 10%. As per the rules, the duration of the debt ETF or index fund should not deviate more than 5% from the duration of the index.
In the event where the credit rating of an issuance falls below the investment grade, rebalancing by the debt ETF must be done within five working days. All debt ETF issuers should also ensure compliance with the rules for rebalancing at the end of every quarter. These rules will be applicable to all debt ETFs tracking debt indices.
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