SEBI Rules on Index Providers

What is in the News?

In a move to bring more transparency and structure to the market, SEBI shared a consultation paper on the regulatory framework for index providers.

 Who are Index Providers?

• Index providers are those institutions that formulate and manage indices. 
• While S&P Dow Jones, MSCI, and Bloomberg are some of the globally renowned institutions that provide indices, in India that activity is generally carried out by subsidiaries of stock exchanges, a joint venture between an exchange and an index provider or entities working in the area of credit rating.
• The most prominent indices in India are the Nifty50 by NSE Indices, and Sensex provided by a venture of S&P Dow Jones Indices and BSE.

Why Should these be Regulated?

• Since the services of these index providers determine the level of investment in the market through passive mutual fund schemes, it is necessary to regulate these institutions to safeguard investor interests.
• EU Benchmark Regulation was published in 2016 and was one of the first regulations that sought to oversee the functioning of index providers. Along similar lines, the UK, Australia, Singapore, Japan and Korea also brought regulations to govern the benchmark-setting process.
• SEBI’s proposed regulations adhere to the principles of the International Organization of Securities Commissions (IOSCO), the global standard setter for the securities sector.

 Proposed Regulated Framework by SEBI

• Index providers must be legal entities with a minimum net worth of ₹25 crores.
• Must maintain independence and integrity of the index determination process.
• Must exercise due diligence in onboarding data submitters.

 Extra Info for Prelims

• SEBI : The Securities and Exchange Board of India is the statutory regulatory body for securities and commodity markets in India, established in 1988, headquartered in Mumbai, and owned by the Ministry of Finance within the Government of India.
• IOSCO : The International Organization of Securities Commissions is an association of organizations that regulate the world’s securities and futures markets, established in 1983, and headquartered in Madrid, Spain. SEBI is a member.

Practice Questions for Prelims

 Q. Consider the following statements:

1. Securities and Exchange Board of India is the regulator of all segments of Financial Markets in India.
2. SEBI is a statutory body.
3. In India, both National Stock Exchange and Bombay Stock Exchange are regulated by SEBI.

Which of the above statements is/are correct?
1. 1 and 2 only 
2. 2 and 3 only 
3. 1 and 3 only 
4. 1, 2 and 3

Ans. b

Mains Practice Question

Analyze the role of the Securities and Exchange Board of India (SEBI) in regulating the securities market in India. How effective has SEBI been in promoting investor protection and market integrity? Examine.

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