SEBI's Regulatory Framework for Index Providers [UPSC Notes]

The government has put the onus of regulating the practices of market index providers on the Securities Exchange Board of India (SEBI). In this context, know what is the proposed regulatory framework for index providers by SEBI, and other related details for the IAS exam economy segment.

What is an Index and why should it be regulated?

• An index makes it possible for stakeholders to have a quick snapshot of the market.
• The benchmark indices BSE Sensex and NSE Nifty are just a couple of the significant indexes in India.
• Regulation of these institutions is required to protect investor interests because the degree of market investment made through passive mutual fund schemes is determined by the services of these index providers.
• Savings held by passive investors in funds tied to indices that have included or kept a number of risky stocks have raised questions about their safety.

What is an Index Provider?

• Companies that create and calculate indexes are known as index providers.
• They are in charge of establishing the guidelines that determine which securities belong in each index, how the index will be run, and how securities will be added to or subtracted from that index over time.

Current Regulation of Index Providers:

• Currently, mutual funds and insurance firms employ index services offered by exchange platforms and rating organisations to track performance and provide ETFs and index funds.
• At present, SEBI has no jurisdiction over index providers. However, in 2017, SEBI published a code of conduct for them.

SEBI proposed regulatory framework for index providers

• The market watchdog had expressed worries about potential conflicts of interest in the governance of index providers in a draft regulatory framework that was put up in December 2022.
• These companies could use their discretion to alter the methodology, which would cause a stock to be included or excluded from the index or modify the weights assigned to the component stocks.
• According to SEBI, their choices may have an impact on the availability, price, and volume of such stocks as well as on investors’ returns from index funds.

Global Examples

• One of the earliest rules that attempted to regulate the operation of index providers was the EU Benchmark Regulation, which was published in 2016.
• Similar to the UK, Australia, Singapore, Japan, and Korea introduced legislation to control the benchmark-setting procedure.

Conclusion: SEBI has emphasized the importance of increased regulation of currently uncontrolled index providers. To encourage voluntary adoption of best practices, SEBI may start a conversation with index providers and offer incentives such as a reduction in annual fees or in procedural requirements.

SEBI’s Regulatory Framework for Index Providers:- Download PDF Here