Sebi proposes regulatory framework for index providers, Rs 25 cr net worth

The regulator has floated a fresh consultation paper proposing provisions for eligibility, disclosures and audit

The Securities and Exchange of India (Sebi) is planning to introduce a regulatory framework for index providers, both domestic and foreign, for increasing transparency and accountability in governance and administration of the financial benchmarks.

In the consultation paper floated on December 28, the capital markets regulator has proposed that the index providers offering indices for use in India will be required to register with Sebi for obtaining authorisation and must have a minimum net worth of Rs 25 crore.

Regulations for index providers will prescribe provisions for eligibility criteria, compliance, disclosures, periodic audits, and penal action in case of non-compliance or incorrect disclosures.

“Given the varied functions that an index serves, it is essential that it is reliable, its construction and modification is transparent, its management is subject to adequate governance and accountability mechanisms, etc,” said Sebi.

These indices are used for benchmarking actively managed mutual funds, or are linked to creation of exchange traded derivatives, index funds, exchange-traded funds (ETFs) and market-linked debentures.

Under the proposed norms, the index provider must be a legal entity, declaring independent professionals providing benchmarking services ineligible. Every two years, index providers will be assessed by independent external auditors to evaluate adherence to principles of IOSCO.

Index providers will need to have a track record of minimum five years of index administration or employ at least two persons each having five years of experience in the business of index provider.

“In case an index provider is engaged in any other activity, the activity of Index  Provider  in  general  and  the  benchmark  determination  process  in particular  shall  be  completely  ring-fenced  to prevent  sharing/leakage  of any sensitive information which may be exploited towards furthering the commercial interest of the other activity of the entity,” said Sebi.

The proposals in the consultation paper are based on the recommendation of the Secondary Market Advisory Committee (SMAC). Comments from market participants have to be submitted by January 27, 2023.

Currently, the index participants are outside the regulatory purview. Sebi noted that though there are disclosures on methodology, it is still possible to exercise discretion through changes in the methodology resulting in exclusion or inclusion of a stock or a change in the weightage.  

At present, the benchmarks and indices tracked by fund managers are owned and managed by entities which are either subsidiaries of stock exchanges or joint ventures between an exchange and an index provider, or could be an entity engaged in credit rating.

Furthermore, there can be indices designed by the foreign index providers that are tracked by the fund managers in India.