Sebi plans to regulate index providers

Issues such as conflicts of interest and audit requirements sought to be addressed

The Securities and Exchange Board of India is working on regulations for index providers — entities which design and develop benchmark indices such as the S&P BSE Sensex and the CNX Nifty.

The framework would be aimed at addressing issues such as avoiding conflicts of interest, creation of a robust audit mechanism and a whistleblower framework for alerts on wrongdoing.

Work on these is on, according to a source. There are already similar guidelines which have been put in place by an international regulatory forum to address potential conflicts of interest, said another.

KEY PRINCIPLES FOR OVERSIGHT

• Avoiding conflict of interest
• Putting in place a whistleblower mechanism
• Oversight of third parties
• Transparency of benchmark determinations
• Requiring internal oversight and maintaining transparency

A report from The International Organisation of Securities Commissions (Iosco) recommends ensuring people who create the index do not report to those looking after the commercial interest of the company. It may also include remuneration policies not dependent on the levels of the benchmark, as well as a whistleblower mechanism to pick up any transgression early on.

“Iosco members should encourage implementation of the principles, including through regulatory action where appropriate,” said its July 2013 final report, titled ‘Principles for financial benchmarks’.

Iosco is an international body of regulators whose members span 115 jurisdictions and cover 95 per cent of the world’s securities markets. It had said member-bodies could also consider adopting these to their jurisdictions.

Officials with index providers have suggested the business largely grows with the growth in exchange traded funds (ETFs), which pay them a fee for creating a portfolio based on their benchmarks. However, the ETF market in India is limited, at less than one per cent of the mutual fund sector's Rs 12 lakh crore in total assets under management (AUM). These took off in developed markets such as America after 401K-like pension plans began to invest in these.

“In India, the indexing space is just about starting to take off and with encouragement from policy makers and regulations, there is a good possibility of the growth of passive investment vehicles. It's still early days for index providers in India but the business holds good prospects, though its full potential will be dependent on the growth of more indexed products,” said a spokesperson for Asia Index Pvt Ltd.

“Some of the key drivers for ETF growth in general are increased awareness of passive investments, the Government of India using this route for part of its disinvestment program (as with the CPSE ETF), and improvement in investor sentiment towards equity investments. There has been increased awareness about the ETF category due to the product training and awareness programme conducted by the National Stock Exchange and leading AMCs. Both the retail and institutional categories have been exploring the ETF route for investment,” said a spokesperson for India Index Services & Products, a subsidiary of NSE Strategic Investment Corporation, which helps maintain the Nifty and other indices.

The spokesperson said the AUM of such ETFs grew 576 per cent over the past year, from Rs 928 crore (as on March 31, 2014) to Rs 6,282 crore (as on Feb 26, 2015).

“Globally, there are the Iosco principles, which form an internationally consistent approach and have been implemented by large index providers, including the S&P DJI. They cover best practices for index governance and construction, including such things as the management of conflicts of interest,” said the Asia Index spokesperson.