Consultation paper on Regulatory Framework for Index Provider

[1]On 28th December, 2022, SEBI issued a consultation paper providing for a strong framework for domestic and foreign index providers to increase transparency and accountability in governance and administration of financial indices and benchmarks in the Indian securities market. These recommendations state that the index providers, which help in measuring, understanding and studying the market or a group of the market, shall be required to be registered with SEBI for obtaining authorization for introduction of indices in India and shall be a legal entity under the Companies Act in the country of origin. These index providers must have a net worth of a minimum of Rs 25 cr.and a 5-year index administration experience.

The paper states that these regulations will include compliance and disclosure requirements, periodicity of audits and penalties for non-compliance. Mutual funds, index funds, exchange traded funds and market-linked debentures use such indices as benchmarks. The paper states that the index providers must comply with the International Organization of Securities Commissions(IOSCO) guidelines and shall be subject to assessments by independent external auditorsonce in every two years.

A review committee for the current index design will need to be formed by the index provider. The committee will also review any recommended modifications to the benchmarking process. According to the regulations, the index provider must have policies and processes in place, to handle conflicts of interest and to safeguard the independence and integrity of various tasks carried out in conjunction with index determination.

Secondary Market Advisory Committee (SMAC)’s recommendations act as a foundation for the consultation paper. It is open to stakeholder comments till January 27^th 2023.

Currently, there are no specific regulations for index participants and apart from the market indices, bespoke indices created at the request of fund managers are also tracked by them.

[1] https://www.sebi.gov.in/reports-and-statistics/reports/dec-2022/consultation-paper-on-regulatory-framework-for-index-provider_66703.html