Wednesday, 29 March 2017

SEBI halts approvals for sectoral ETFs; mulls cap on single stock weightage

The Securities and Exchange Board (SEBI) of India is considering a fresh set of guidelines for exchange-traded funds (ETFs) with sectoral indices as the underlying, sources told Moneycontrol.

The Securities and Exchange Board (SEBI) of India is considering a fresh set of guidelines for exchange-traded funds (ETFs) with sectoral indices as the underlying, sources told Moneycontrol.

The regulator is mulling limits on the weightages of individual companies in the indices, the sources said.

The SEBI has halted approvals to new ETFs, other than those with Nifty and Sensex as the underlying, over the last year as it is concerned about the excessive weightage of some stocks in sectoral indices. The skew in weightage has been more pronounced in the case of ETFs linked to bank indices.

In an ETF, the fund manager deploys the funds in the index constituents in proportion to the weight of the individual constituents in the indices.

Excessive weightage for a few stocks contradicts the concept of risk diversification.

"The regulator may cap the weightage for individual stocks as is the case in overseas markets,” a source familiar with the development told Moneycontrol.

In some developed markets, the excess weightage is then distributed among the other index constituents.

"If the weightage norms are introduced, then indices will also have to be  constructed on a similar criteria," a source said.

Among instances of excess weightage, State Bank of India has a weightage of more than 64 percent in the PSU banks index on the NSE.

Similarly, HDFC Bank has a weightage of more than 32 percent among private bank indices on the NSE. In Bombay Stock Exchange Bank indices HDFC Bank holds 26.55 percent weightage.

Among FMCG indices on the Nifty, ITC alone accounts for 53 percent while Hindustan Unilever’s weightage is 14 percent.

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