SEBI Norms for Index Providers in India

IAS Prelims 2023

Securities and Exchange Board of India (SEBI) has proposed new norms for index providers with emphasis on more disclosures and greater transparency. The Securities and Exchange Board of India is the regulator for the securities market in India.

Indices are generally composed by subsidiaries of stock exchanges and foreign entities such as S&P. At present, these entities are not under the regulatory ambit of SEBI.

The major indices on the NSE are managed by its subsidiary India Index Services and Products, which maintains over 80 equity indices.

The major indices at the BSE, including the Sensex, are managed by Asia Index Pvt Ltd.

SEBI has proposed a new code of conduct for index providers and measures to address issues such as avoiding conflict of interest, creation of a robust audit mechanism and a whistle-blower framework to facilitate early detection of misconduct.

These suggestions are in line with the International Organisation of Securities Commissions’ principles which are globally accepted standards for index providers.

SEBI Proposed Following Norms:

An index provider should have appropriate governance arrangements in place in order to protect the integrity of the index administration process, mitigate conflicts of interest, and segregate those responsible for index governance from those responsible for commercialising the indices by implementing appropriate firewalls and employing separate reporting lines for each function.

The index provider should have an oversight function for all aspects of the index administration process.

The function should be separate and distinct from the direct day-to-day process of index calculation and maintenance and, as such, be independent of the actual index calculation process.

Among others, oversight function should be to review any need for change in the index design or computation methodology due to changes in market dynamics or any other reason; and overseeing results of audits and direct implementation of remedial actions recommended by those audits.

An index provider should make the methodology documents publicly available to facilitate an understanding of how the index seeks to measure the interest and how the index is calculated and maintained. It should also seek market feedback as appropriate for significant changes to the methodology.

The index provider should retain written records and audit trails for five years.

Also, they should submit a monthly or quarterly report providing details regarding compliance with the code of conduct to Sebi.

Index providers need to inform Sebi immediately upon signing agreement with foreign jurisdiction for licensing indices. Besides, they should inform the regulator before launching any product overseas.

Any new license of Indian Indices by an Indian index provider in other jurisdiction should be a membership of Financial Action Task Force (FATF) among ther requirements.