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Margareta Hricova: Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investments. I am Margareta Hricova and joining me today is Anil Ghelani, Head of Passive Investments & Products at DSP Mutual Funds, and Deborah Fuhr.
Anil Ghelani: Thank you very much, Margareta and Debbie. Thank you for having me.
Deborah Fuhr: Thank you and great to see you. So SEBI has recently released a paper outlining proposed changes for ETFs and index funds. Why do you think they’re doing this now?
Anil Ghelani: Structurally, I think, in the Indian context, the ETFs and index funds and overall passive landscape has been growing very fast over the past 4 to 5 years. So as India aligns itself to withstand that kind of growth in this particular segment of the market, I believe that our capital markets regulator, SEBI, has come up with a very prudent set of measures addressed to about eight elements of the capital markets.
So it’s not just to asset management companies like us or the manufacturers of the ETFs, but all the clearing corporations, brokers or secondary market intermediaries, stock exchanges and traditional transfer agents. So it has, in short, covered the entire framework of the entire ecosystem of ETFs and index funds, together. This kind of very robust equity framework people will go a very long way in ensuring we have a good, robust growth.
Margareta Hricova: The CFA Society published a paper on the ETF industry in India. When was the first ETF listed in India and what is the current landscape for ETFs?
Anil Ghelani: I’d say for CFA Society India, just to highlight I am an associate in a voluntary capacity as a board member, so I remember very distinctly 2001 was the first ETF launch in India. Very small ETF it was at that point, the whole concept of pooled vehicles like mutual funds itself was new at that point in India, relatively new. And within that ETFs was an even more alien concept.
The first ETF in 2001 was a plain vanilla ETF on an equity index, one of India’s bellwether indices called NIFTY 50. And after that, many other indices, etfs and index funds got launched. Today, world over, if you look at professionally managed assets under management, it is close to $105 trillion. From this 105 trillion, close to about 11% is into ETFs and index funds.
In India out of our $500 billion worth of total assets under management, we have about $67 billion in ETFs and index funds. So it’s close to 13% of the total assets under management by ETFs and index funds.
Deborah Fuhr: Can you summarize the changes that SEBI is proposing in the paper?
Anil Ghelani: The circular is focusing on four key pillars. So the first and foremost part of the circular which I will touch upon, is about fixed income side. That index funds and ETFs often are considered a little bit complex because there is a lot of risk-based optimization other than full replication of the portfolios by the portfolio manager.
So SEBI, in this regard, has come out with very prudent guidelines and a very robust framework around which replication and optimization will work for the fixed income ETFs. And one more very important thing is that they have classified fixed income ETFs and index funds separately for the purposes of tracking difference.
Earlier there was a very broad band covering both equity and fixed income. Now they have segregated the two. Recognizing that in fiction you should ideally not have one too much of divergence and you should have a much more narrower band.
Second pillar of this is about equity ETFs. It is mandated that on a daily basis, each and every fund has to disclose their tracking on the website so that investors and advisors can easily track it and analyze it for their analytics.
The third pillar is about the market maker ecosystem. So this was a very big thing, which a lot of us as market practitioners were trying to get implemented. In many global markets there are various laws and regulations around it. So now the onus is cast upon us as manufacturers or portfolio managers, that we need to appoint minimum two market makers for our ETFs. Our leader said, okay, you need to have a market maker. Of course, as general practice at DSP we have got multiple market makers that most of the players would have, but now it is cast in stone that it’s minimum two market makers you should have.
Last and the fourth pillar is about investors and how investors gain access to the ETFs and index funds, so in most of the global markets now, investors cannot directly come to the fund house. It’s only participants or market makers who can come to the fund house for creating units or extinguishing units. Now in the Indian market, also, they have kept a much more higher threshold of an Indian rupi term above 25, which translates to $3.25 million. Below that threshold, all is compulsorily contributed to the stock exchange. So this will ensure investors get more easy access to the exchange mechanism, better price discovery, and higher level of transparency.
Margareta Hricova: Anil, thank you for joining us.
Anil Ghelani: Thank you.
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Anil Ghelani: ETF TV News does not provide investment advice nor recommend products.