Latest SEBI circular introduces a new passive ELSS scheme category

The securities market regulator, SEBI came out with a circular on May 23 on ‘Development of Passive Funds’ covering a gamut of issues related to ETFs (exchange traded funds) and index funds. Notably, the circular has introduced a new category of mutual fund schemes – Passive ELSS (equity linked savings scheme). 

Passive ELSS 

As per the latest circular, passive ELSS scheme will be based on one of the indices comprising equity shares from top 250 companies in terms of market capitalization. The last time SEBI undertook a major overhaul of mutual schemes was in October 2017 whereby the regulator standardised scheme categories and the characteristics of each category to being uniformity and standardisation in the mutual fund space. Based on this circular, ELSS was one category of schemes under ‘equity schemes. Following the latest change, which comes into effect from July 1, this will be termed as ‘Active ELSS scheme’.  

In addition, ‘Passive ELSS scheme’ will be introduced under the heading of ‘other schemes’. However, a mutual fund AMC can launch only one of the two and not both. ELSS schemes are open-ended equity-linked schemes that have a 3-year lock-in and are enjoy tax benefit under section 80C of the Income Tax Act. This allows an individual a tax deduction of up to Rs. 1.5 lakh every financial year for investments made in the scheme, among other eligible investment avenues covered under the section.  

Greater clarity  

To serve the purpose of greater clarity for investors, the circular also specifies that the nomenclature for ETFs / index funds should include the name of the underlying index or good that they track. Also, once an ETF gets listed on the exchanges, the scrip code of such ETFs must be disclosed in the nomenclature at all places.  

Norms for debt ETFs 

Among several norms that have been specified, AMCs have been tasked with ensuring that in case of debt ETFs/ index funds, the relevant index must not have more than 25% weight to a particular group (excluding securities issued by PSUs, public financial institutions (PFIs) and public sector banks (PSBs). Also, the index should not have more than 25% weight to a particular sector (excluding G-secs, T-bills, SDLs and AAA- rated securities issued by PSUs, PFIs and PSBs). Thematic or sectoral indices have, however, been excluded from this provision. The application of these provision should help cap concentration risk in debt ETFs/ index funds.