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In a consultation paper, SEBI said that it will regulate index providers offering services in India. The move will make the market regulator closely scrutinize the construction of index.
Currently, index providers are outside the purview of SEBI. However, SEBI had issued a code of conduct for them in 2017.
Currently, exchange platforms and rating agencies offer index services which is widely used by mutual funds and insurance companies to track performance and offer ETFs and index funds.
Sharing the rationale, SEBI said that while the index providers disclose the methodology of index construction, it is still possible to exercise discretion through changes in methodology that can lead to inclusion and exclusion of a stock in the index or change in the weightage of the constituent stocks. This has a significant impact on the returns of index funds.
SEBI said, “There exists a possibility of conflict of interest arising in the governance and administration of indices/benchmarks due to presence of an element of discretion in management of indices including rebalancing of the index, in methodology adopted for construction of index including selection of stocks and in licensing of such indices. Conflict of interest could also arise as index administrators may not fully implement policies to ensure protection of sensitive information (e.g.; information regarding inclusion or exclusion of a particular stock from index could be misused).”
Here are some key proposals based on the consolation paper:
- All index providers (IP) offering services to Indians will have to get themselves registered with SEBI
- IPs must have net worth of at least Rs.25 crore
- IPs must have at least a 5-year track record in index administration. Alternatively, IPs should have at least two employees, each having minimum 5 years of relevant experience
- IPs will have to constitute an oversight committee for reviewing existing index design and proposed changes to benchmark methodology. The committee will also oversee audit results and implementation of audit observations
- IPs will have to follow policies/procedures to manage conflicts of interest
- IPs will have to prevent sharing and leakage of any sensitive information
- IPs will have to document their methodology for index calculation publicly
- IPs will have to offer a grievance redressal mechanism including an online facility for arbitration between the index provider and customer/client
The consultation paper also said that in case of any adverse findings or non-adherence, SEBI at its sole discretion can take appropriate action/direction.
Open for suggestions
The regulator has invited stakeholders to share their comments on the proposed regulatory framework by January 27, 2023. The prescribed format and contact details are given in the consultation paper.
