SEBI enhances ETFs: SEBI has proposed amendments to rules governing ETFs and index funds, aiming to enhance their robustness. Currently, these funds face a restriction where they cannot invest in listed shares of group companies or sponsor companies beyond 25 per cent of their net assets. This limitation hampers the flexibility of passive funds investing in thematic and sector indices. To address this, SEBI plans to relax this limit.

Enhancing index replication

The proposed changes aim to ensure that ETFs and index funds can replicate their benchmark indices more effectively. SEBI suggests removing the restriction on investing up to 25 per cent of net assets in group companies or sponsors. Instead, these funds would be allowed to invest in listed companies' shares belonging to group companies of the sponsor, in line with their benchmark indices. This proposal, part of SEBI's efforts to streamline mutual fund operations, was outlined in a consultation paper released on February 23.

Under the current regulations, mutual fund schemes face constraints on their investments in underlying shares and bonds. For instance, no scheme can invest more than 10 per cent of its NAV in shares of a single company. Additionally, the total exposure to listed equity shares of group companies of the sponsor cannot exceed 25 per cent of net assets. However, SEBI rules for index funds and ETFs permit a single company to have a maximum weight of 35 per cent in a sector/thematic benchmark index. To facilitate closer replication of benchmark indices, SEBI now proposes relaxing the 25 per cent cap restriction for such funds.

Streamlining asset management

SEBI also suggests easing the requirement for a separate and dedicated fund manager overseeing gold, silver, and foreign investments in a scheme. It argues that having dedicated managers for schemes diversifying into such assets might be costly, considering that fund houses likely already have research analysts tracking these asset classes. Therefore, SEBI proposes eliminating the need for a dedicated fund manager for commodities and foreign investments.

Furthermore, SEBI proposes making nominations optional for jointly-held mutual fund folios. The rationale behind this suggestion is that the second holder legally supersedes a nominee as a legal heir, making nominations unnecessary for jointly-held folios. Additionally, this would eliminate the requirement to obtain consent from all joint holders to approve or change a nominee, which the working group deemed burdensome.