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Mitali Bhutta made post

What are the key recommendations that SEBI made last week on the subject of Debt ETFs?

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Dawn Cherian answered.
9 months ago

The Securities and Exchange Board of India (SEBI) issued its draft norms for debt ETFs (exchange traded funds) on 29th November. This set the tone for the introduction of passive debt funds in India. Passive equity funds in the form of index funds and index ETFs are quite popular. What was missing from the palate was the presence of ETFs that are pegged to debt. These norms issued by SEBI will apply to all ETFs that are under process and that will be issued in the future. However, any ETFs based on government securities or treasury bills will not be covered by this circular.

Some of the key debt ETF recommendations can be summarized as discussed. SEBI has made some important changes to clarify the position of debt ETFs in the Indian context. To begin with, each debt ETF created must have a minimum of 8 issuers. To reduce concentration risk, no issuer can have a presence of more than 15% in a single ETF. Each ETF must be a combination of bonds with similar ratings and similar duration profile, with little variation. ETFs can also buy bonds that are outside the index but in such cases they have to ensure that the credit rating and the duration profile closely mirrors the existing ETF constituents. Only investment grade debt will be permitted to be included in the ETF portfolio and in case of the bond falling below investing grade, the exit must be within 5 days. Any index that is proposed to be tracked by the ETF must adhere to these regulations.