New Rule Changes From Sebi: Index Funds To Track Indices Better, Mechanism To Combat Market Manipulation

Securities and Exchanges Board of Indian (Sebi) in its 205th board meeting on April 30, 2024, introduced changes to passive fund regulations, to make sure index funds and ETFs track the indices in a way true to their names. The key change brought in the Sebi board meeting was lifting the 25 per cent cap on index funds and ETFs to invest in shares of group companies of their sponsors. Now, these funds can invest up to 35 per cent of their assets in such entities, harmonising their investment approach in line with their names, that of passive funds that track indices.

To ensure, that mutual fund schemes don't invest arbitrarily in their sponsor companies Sebi had laid that these schemes cannot invest in shares of any single scrip over 10 per cent of its Net Asset Value (NAV) and total exposure to shares of group companies of the sponsor should be under 25 per cent of its net assets. But some group companies have up to a maximum of 35 per cent weight in some thematic benchmark index, as per rules. To make sure the passive funds track their benchmark indices closely, Sebi now allows up to 35 per cent investment in sponsor companies.

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Institutional Mechanism Against Front Running

Further, Sebi asked mutual fund houses the establish institutional mechanisms to detect and prevent market-abusing practices like front-running and fraudulent transactions. “The mechanism shall consist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading, misuse of sensitive information, etc,” Sebi release said. They were also asked to set up a robust whistle-blower policy to ensure those reporting market manipulation are properly heard and aren’t victimized.

Other Changes

Further Sebi approved measures to enhance non-institutional investor participation in the bond market, allowing issuers the option to issue Non-Convertible Debentures (NCDs) or Non-Convertible Redeemable Preference Shares (NCRPS) through private placement mode at a reduced face value of Rs. 10,000. 

Sebi also decided to permit listed entities with only non-convertible securities to give an intimation (in the form of a window advertisement) with a reference to the QR code and link to the website of the listed entity and stock exchange in the newspapers regarding the financial results of the listed entity instead of disclosure of full financial results.

Vishal Goenka, Co-Founder of IndiaBonds.com said, “ As more than 90 per cent of issued corporate debt is privately placed, reduction in face value of privately placed debt to Rs 10,000 from current Rs. 1 lakh, subject to the appointment of Merchant Banker will accelerate the retailisation of the corporate bond markets due to reduction in investment minimum size.”

On Disclosure of financial statements via QR code or Weblink, he said, “Digitisation of the fixed income industry will help in fast information dissemination and also increase efficiencies in the listing of debt.”