SEBI proposes game-changing relaxations for index funds and ETFs: What investors need to know

The Securities and Exchange Board of India (SEBI) is set to usher in a significant shift in the investment landscape, particularly for index funds and Exchange-Traded Funds (ETFs). In a recent proposal, SEBI aims to remove a longstanding restriction that limits these passive funds’ ability to invest in group companies or sponsors beyond 25 percent of their net assets. This move is part of SEBI’s broader initiatives to streamline mutual fund operations and enhance ease of doing business.

SEBI’s proposal revolves around eliminating the 25 percent cap on investments in group companies or sponsors for index funds and ETFs. Essentially, this means that these funds can now invest in shares of listed companies affiliated with their sponsors, aligning with the benchmarks they track. The move aims to facilitate a more accurate replication of benchmark indices by passive funds, contributing to a more seamless investment experience.


SEBI’s move is driven by a desire to ensure that index funds and ETFs can mirror their benchmark indices as closely as possible. By removing the 25 percent upper cap restriction, the capital market regulator seeks to enhance the ability of passive funds to replicate thematic and sector indices more effectively. This proposed change aligns with SEBI’s commitment to fostering a conducive environment for mutual funds and falls under the broader umbrella of ease of doing business initiatives.

Additional proposals to enhance operational efficiency:

Relaxation on fund manager requirement:

SEBI has also proposed easing the requirement of having a separate and dedicated fund manager for schemes overseeing gold, silver, and foreign investments. The rationale is to address potential cost implications and leverage existing research capabilities within fund houses, making the management of such assets more efficient.

Optional nominations for jointly-held mutual fund folios:

SEBI has suggested making nominations optional for jointly-held mutual fund folios. The proposal stems from the acknowledgment that joint holders take legal precedence over nominees as legal heirs. This change is expected to simplify operational procedures by eliminating the need for unanimous joint holder consent for nominee approvals or changes.

Investors in index funds and ETFs stand to benefit from these proposed relaxations. The increased flexibility in investing in group companies and sponsors beyond the 25 percent threshold allows these funds to better align with benchmark indices. Additionally, operational enhancements, such as optional nominations for jointly-held folios, contribute to a more investor-friendly ecosystem.

SEBI’s proposed relaxations mark a pivotal moment for passive fund investors in India. The potential removal of the 25 percent cap on investments in group companies and sponsors reflects the regulator’s commitment to fostering a conducive environment for mutual funds. As these proposals are open for public comments until March 15, investors and industry stakeholders have an opportunity to provide valuable insights into shaping the future landscape of index funds and ETFs in India.