To make sure that index funds and exchange-traded funds (ETF) replicate their benchmark indices to the fullest extent, the capital market regulator, the Securities and Exchange Board of India (SEBI) has proposed to remove a minor impediment for them.

It has proposed to remove the restriction to invest up to 25 percent (of their net assets) in group companies or sponsors. In other words, SEBI has proposed that index funds and ETFs can invest in listed companies’ shares that belong to group companies of the sponsor, to the extent that their benchmark indices allow. This relaxation is part of ease of doing business proposals for mutual funds, that SEBI has put forth for consultation, in a paper it came out with on February 23. SEBI has constituted working groups to recommend steps- in various capital market areas that it oversees- to make it easier for firms (like mutual funds and so on) to do their business. SEBI’s consultation paper on February 23 is part of one of its working group’s recommendations.

To be sure, mutual fund schemes cannot invest arbitrarily, as much as they want to, in underlying shares and bonds of companies. For instance, no scheme can invest in shares of any single scrip over 10 percent of its Net Asset Value (NAV). The total exposure of the scheme to listed equity shares of group companies of the sponsor must not exceed 25 percent of its net assets. However, as per SEBI rules for index funds and ETFs, a single company is allowed to have a maximum of 35 percent weight in a sector / thematic benchmark index. To make life easier for passive funds to mimic their benchmark indices easier and more closely, SEBI has now proposed to relax the 25 percent upper cap restriction for such funds.

SEBI has also proposed to relax the requirement of having a separate and dedicated fund manager in a scheme to oversee gold, silver (and other commodities) and foreign investments. SEBI has noted that having dedicated managers in schemes that diversify in such assets (think of domestic equity funds that also invest a part of their corpora overseas or multi-asset funds that invest in gold or silver)- over and above the usual fund managers of those schemes- might be a costly affair. Further, fund houses might already have dedicated research analysts in their teams who would be tracking such asset classes. Therefore, a dedicated fund manager might not be necessary to track commodities and foreign investments, SEBI has proposed in its consultation paper.

SEBI has also proposed to make nominations optional for jointly-held mutual fund folios. The working group- set up by SEBI to suggest ease of doing business for mutual funds- has suggested to SEBI that since the second holder takes legal precedence over a nominee in terms of being a legal heir, nominations needn’t be made mandatory for jointly-held folios. Besides, SEBI noted that this will also solve the botheration of having to take all joint holders’ consent to approve or change a nominee; a requirement that the working group noted was onerous.