SEBI (Securities and Exchange Board of India) has made significant changes affecting index funds and Exchange Traded Funds. The new rules allow these passive funds to invest more in group companies of their sponsors. This move, announced on April 30, aims to align passive funds more closely with their benchmark indices. Additionally, SEBI is tightening regulations to catch market abuses like front-running, signalling a proactive approach towards investor protection. How do all these changes affect you?
Let’s take a look!
SEBI Rules for Index Funds and ETFs| Key Highlights
- SEBI relaxes investment restrictions for index and ETFs in group companies of sponsors.
- Passive funds now allowed to invest up to 35% of their corpuses in sponsor group companies.
- SEBI mandates mutual fund houses to establish frameworks for detecting front-running.
- Mutual fund schemes can’t invest more than 10% of NAV in any single company’s shares.
- Total exposure to sponsor group companies limited to 25% of net assets for mutual fund schemes.
- SEBI eases the 25% upper cap restriction for index funds and ETFs to enhance benchmark replication.
Harmonizing Passive Fund Investments
SEBI previously imposed restrictions on mutual fund schemes, limiting their investments.
What were the Old Rules For Passive Funds?
Previously, index funds and ETFs were restricted in how much they could invest in companies related to their sponsors.
For instance, schemes could not invest more than 10 percent of their Net Asset value in shares of any single scrip.
The total exposure to listed equity shares of group companies of the sponsor was capped at 25 percent of net assets.
They could only put up to 25 percent of their money into such group companies.
What are the New SEBI Rules For Index funds and ETFs?
SEBI has relaxed these rules for index funds and ETFs.
SEBI lifted this restriction, now allowing these funds to invest up to 35 percent of their money in group companies of their sponsors.
A single company can now have a maximum weight of 35 percent in a sector/thematic benchmark index.
What It Means for Investors?
For folks investing in index funds and ETFs, this means more flexibility and potentially better alignment with the benchmark indices they track.
It could lead to improved performance and reduced tracking errors.
This tweak aims to make it easier for these funds to mirror their benchmark indices more accurately.
Check out the advantages of passive investing.
Enhanced Surveillance Against Market Abuse
In addition to easing investment restrictions, SEBI has mandated mutual fund houses to establish systems to detect market abuse practices.
These practices include front-running and fraudulent transactions.
Front running is when someone buys or sells stocks based on knowing what others are going to do, like their clients’ orders. They do this to make a profit before the others’ trades affect the stock price. It’s unfair and against the rules because it gives them an advantage over regular investors.
SEBI requires mutual fund houses to follow the following:
- Enhanced surveillance systems.
- Internal control procedures.
- Escalation processes to identify, monitor, and address specific types of misconduct.
SEBI emphasised the importance of implementing a robust whistle-blower policy.
This policy ensures the protection of individuals reporting instances of market abuse from victimisation.
Recent Cases of Market Abuse in Indian Stock Market
SEBI’s actions come in response to recent instances of market abuse within the mutual fund industry. Some fund houses have detected cases of front-running, where individuals trade securities based on advanced knowledge of pending transactions that will affect the security’s price.
By requiring fund houses to establish surveillance systems, SEBI aims to proactively address such misconduct. Additionally, it aims to strengthen investor protection in the mutual fund industry.
Conclusion
SEBI’s decision to relax investment restrictions for index funds and ETFs reflects an effort to align regulations with market dynamics. The main objective is to enhance investor protection.
By enabling passive funds to mimic their benchmark indices better and instituting measures to detect and prevent market abuse, SEBI seeks to promote transparency.
Source- moneycontrol.com
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.