In an addendum, the Securities Exchange Board of India (Sebi) has extended the time for asset management companies (AMCs) to implement its order on direct buying and selling ETFs.
Sebi said it is postponing the implementation of Clause 2 (IV) (A) of its passive mutual fund circular that allowed transactions above a specified threshold conducted directly with AMCs to May 1, 2023.
The clause is aimed at enhancing the liquidity of the exchange-traded fund (ETF) units by facilitating their direct transactions with the respective AMCs for an order value of more than Rs 25 crore.
“Any order placed for redemption or subscription directly with the AMC must be of greater than Rs 25 crore. The threshold shall not be applicable for MMs and shall be periodically reviewed,” Sebi’s May 23, 2022, circular said.
It was to be implemented on July 1, 2022, before delaying it to November 1, 2022, and again till May 1, 2023.
Purpose Of The Clause
Since ETFs’ net asset value (NAV) changes during market hours, the clause aims to protect investors’ interests so that they get a fair NAV value regardless of the ETFs’ trading volume.
In the absence of a market maker, it noted, it would be difficult to manage ETF s’ volatility and liquidity, and trading higher quantities of ETFs could become costly. It is because if someone sells them, there also have to be buyers for the same quantity or more.
Hence, the rule allows big investors, with a minimum order of Rs 25 crore, to place it directly with the AMC instead of the stock exchange. In its May circular, Sebi also laid out a plan for small investors whose orders are less than Rs 25 crore.
Sebi said that “Investors can directly approach the AMC for the redemption of units of ETFs for transactions of up to Rs 25 crore without any exit load.”
The redemption of up to Rs 25 crore transaction without exit load has three scenarios wherein it can be used.
● Traded price (closing price) of the ETF units is at a discount of more than 1 per cent to the day-end NAV for 7 continuous trading days, OR
● No quotes for such ETFs are available on stock exchanges for 3 consecutive trading days, or
● Total bid size on the exchange is less than half of the creation units size daily, averaged over a period of 7 consecutive trading days.