Circular on Development of Passive Funds
Summary
This circular establishes the regulatory framework for passive funds, specifically Exchange Traded Funds (ETFs) and Index Funds, in India. It outlines specific norms for Debt ETFs and Index Funds based on corporate debt, government securities, or hybrid indices. The document details requirements for index constitution, replication standards, investment limits, and disclosure obligations for Asset Management Companies. This section establishes rebalancing timelines for ETF and Index Funds following index constituent changes or credit rating downgrades. It defines specific duration and maturity deviation limits for G-Sec, Target Maturity, and Hybrid Debt ETFs to ensure index replication. Additionally, it outlines market-making obligations for Asset Management Companies and sets investor education charges for passive funds. This section establishes operational standards for ETFs, including direct transaction thresholds, tracking error limits, and valuation methods. It mandates specific disclosure requirements for indicative NAVs, liquidity windows, and portfolio composition to ensure transparency. The provisions also define nomenclature rules, minimum subscription amounts, and the app
Text
AMCs shall ensure constituents are aggregated at issuer level, have defined credit rating/maturity, are investment grade, have adequate liquidity, are reviewed half-yearly, and replicate the underlying index subject to specific portfolio requirements.
Single issuer limits vary by rating: 15% for AAA, 12.5% for AA, and 10% for A and below in corporate debt indices; lower limits apply to hybrid indices; no limit applies to G-Sec/SDL indices.
The index shall not have more than 25% weight in a particular group, excluding securities issued by PSUs, PFIs, and PSBs.
The index shall not have more than 25% weight in a particular sector, excluding G-sec, t-bills, SDLs, and AAA rated securities of PSUs, PFIs, and PSBs; not applicable for sectoral/thematic indices.
AMCs shall ensure updated constituents and methodology are available on their websites at all times, along with historical data since inception.
Investment in securities of issuers accounting for at least 60% of weight in the index must represent at least 80% of the NAV.
At no point of time, securities of issuers not forming part of the index shall exceed 20% of the NAV.
At least 8 issuers from the underlying index must form part of the portfolio.
Exposure to single issuer limited to 15% for AAA, 12.5% for AA, and 10% for A and below rated securities.
Total exposure in a particular group shall not exceed 25% of NAV, excluding PSUs, PFIs, and PSBs.
Total exposure in a particular sector shall not exceed 25% of NAV, excluding G-sec, t-Bills, SDLs, and AAA rated securities of PSUs, PFIs, and PSBs; not applicable for sectoral/thematic indices.
Macaulay Duration must replicate the index within +/- 10% deviation; specific tolerances apply for Target Maturity ETFs based on residual maturity.
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Source: SecMarx — Circular on Development of Passive Funds. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.