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(PTI) Capital markets regulator Sebi on Monday allowed mutual funds to launch passively managedEquity-Linked Savings Schemes (ELSS).

However, the regulator said that mutual funds can have either an actively-managed ELSS scheme or a passively-managed one but not in both categories.

The passive ELSS scheme should be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalisation, Sebi said in a circular. The move will allow new fund houses that are especially focusing on passive schemes to float a passively-managed ELSS fund.

Besides, Sebi has put in place a framework for managing passive funds -- Exchange Traded Funds (ETFs) and Index Funds -- amid growing popularity of such funds as an investment product for retail investors.

The new framework will come into effect from July 1 and will be applicable to all existing ETFs and index funds, Sebi said.

Under the framework, the regulator has laid down guidelines for debt ETFs and index funds, its constitution, market making framework for ETFs, investor education and awareness charges, disclosure guidelines and other provisions.

"Considering the emergence of passive funds -- ETFs and index funds as an investment product for retail investors globally and various advantages of passive investing like transparency, diversification, lower cost..., a need was felt to review the regulatory framework for passive funds in India," Sebi said.

In this regard, a Working Group was constituted with representation from various stakeholders in the passive funds' domain like AMCs, mutual fund trustees and stock brokers.

The recommendations of the group and the feedback received from the industry were deliberated in the Mutual Funds Advisory Committee and after considering the recommendations of the committee, Sebi came out with the new framework on the passive funds.

Sebi said the norms for debt ETFs or index funds could be based on indices comprising corporate debt securities or Government Securities (G-Sec), T-bills and/or State Development Loans (SDLs) or a combination of corporate debt securities and G-sec/T-bills/SDLs.

For an index with at least 80 per cent weight of corporate debt securities, a single issuer should not have more than 15 per cent weight in the index in respect of AAA securities, not more than 12.5 per cent in case of AA securities and not more than 10 per cent in case of A and below rated securities.

In case of a hybrid index -- comprising both corporate debt securities and G-Sec /SDL -- with up to 80 per cent weight of corporate debt securities, a single issuer should not have more than 15 per cent weight in the index in respect of AAA-rated securities. However, for AAA-rated securities of PSUs and AAA-rated securities of PFI (Public Financial Institution) issuers the limit will be 15 per cent.

Further, in the case of AA-rated securities, a single issuer should not have more than 8 per cent weight in the index and not more than 6 per cent in respect of A and below rated securities.

"For an index based on G-Sec and SDLs, single issuer limit shall not be applicable," Sebi said, adding that such an index should not have more than 25 per cent weight in a particular group, excluding securities issued by Public Sector Units (PSUs), (PFIs) and Public Sector Banks (PSBs).

With regard to norms for market making framework for ETFs, Sebi said Asset Management Companies (AMCs) need to appoint at least two Market Makers (MMs), who are members of the stock exchanges, for ETFs to provide continuous liquidity on the exchange platform. Such MMs need to transact with AMCs only in multiples of creation unit size.

The AMCs are required to have an approved policy regarding market making in ETFs based on the framework for market making as provided by the regulator. Also, they need to facilitate in-kind creation and redemption of units of ETFs, including debt ETFs, by MMs on a best effort basis.

In respect of investor education and awareness charges, Sebi said charges applicable for investor education and awareness initiatives from ETFs or index funds should be 1 bps of daily net assets of the scheme.

"Fund of Funds investing more than 80 per cent of its NAV (Net Asset Value) in the underlying domestic funds shall not be required to set aside 2 bps of the daily net assets towards investor education and awareness initiatives," Sebi said.

In order to enhance liquidity in units of ETFs on the stock exchange platform, it has been decided that direct transactions with AMCs need to 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 be of greater than ₹25 crore and such a threshold will not be applicable for MMs and should be periodically reviewed.

Further, Sebi said that investors can directly approach the AMC for redemption of units of ETFs, for transactions of up to ₹25 crore without any exit load, in case of certain scenarios.

Sebi said that the minimum subscription amount at the time of New Fund Offer (NFO) for debt ETFs/ index funds and other ETFs/ index funds will be ₹10 crore and ₹5 crore, respectively.

In order to have proper understanding and clarity for investors, the nomenclature for ETFs or index funds will include the name of the underlying index or goods. Further, for ETFs, after listing of the units, the scrip code of such ETFs will also be disclosed in the nomenclature at all places.

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