The regulatory framework for ETFs in India is designed to ensure investor protection while promoting growth and innovation in the financial markets.
The Securities and Exchange Board of India (SEBI) is the primary regulatory authority that oversees the functioning of ETFs in the country.
SEBI Guidelines
SEBI has issued comprehensive guidelines for ETFs, covering aspects such as transparency, liquidity, and investor protection.
ETF issuers are required to disclose their portfolio holdings regularly, and the NAV must be published at the end of each trading day.
This ensures that investors have access to up-to-date information about the assets held by the ETF.
Market Making and Liquidity
SEBI mandates that authorized participants (APs) and market makers are involved in the creation and redemption of ETF shares.
This mechanism helps maintain liquidity and ensures that the market price of an ETF closely tracks its NAV.
Market makers play a crucial role by buying and selling ETF units to bridge price gaps between the ETF’s market price and NAV.
Expense Ratio Cap
SEBI has also placed a cap on the expense ratios for ETFs to ensure that they remain cost-effective for investors.
This cap helps in keeping ETFs as a low-cost alternative to actively managed funds.
Bharat Bond ETF Regulation
The introduction of the Bharat Bond ETF was a major regulatory initiative aimed at promoting debt ETFs in India.
This initiative was specifically designed to encourage investment in public sector bonds while providing a safe, low-cost, and transparent investment option for retail investors.
Taxation
The tax treatment of ETFs in India is similar to that of mutual funds. Equity ETFs are subject to short-term and long-term capital gains taxes, depending on the holding period.
Debt and gold ETFs, on the other hand, have a different tax treatment, with long-term capital gains applicable after a three-year holding period.
These regulations are designed to ensure that ETFs remain transparent, efficient, and accessible for Indian investors while promoting growth in the passive investment space.