SEBI proposes regulatory framework for index providers

“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 serve as benchmarks for actively managed mutual funds, or they are connected to the development of exchange traded derivatives, index funds, exchange-traded funds (ETFs), and market-linked debentures.

Independent professionals offering benchmarking services are disqualified under the proposed standards, which stipulate that the index supplier must be a legal entity. Index providers will be evaluated by independent external auditors every two years to determine compliance with International Organization of Securities Commissions (IOSCO) guidelines.

Index providers must either have a minimum of five years of index administration expertise, or they must employ at least two people with a combined experience of five years in the index provider industry.

“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,” it noted.

The recommendations made by the Secondary Market Advisory Committee  (SMAC) serve as the foundation for the ideas in the consultation document. Market players must provide their comments by January 27, 2023.

The index participants currently fall beyond the regulatory ambit. Despite the methodology's disclosures, Sebi cautioned that it is still possible to use discretion by altering the technique, which might lead to a stock's exclusion or inclusion or a change in weightage.

At the moment, entities that are either stock exchange subsidiaries, joint ventures between an exchange and an index provider, or even an entity involved in credit rating, own and manage the benchmarks and indices that fund managers monitor.

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