Markets regulator Sebi today proposed new norms to regulate index providers — entities which design and develop benchmark indices such as Sensex and Nifty. The index operators, which include subsidiaries of stock exchanges and independent entities such as S&P, currently do not come under Sebi’s direct regulatory purview. The proposed new norms include a code of conduct for index operators, while mandating more disclosures and greater transparency when including or excluding a stock from the indices. Besides, the proposed measures would address issues like avoiding conflict of interest, creation of a robust audit mechanism and a whistle-blower framework to facilitate early detection of potential misconduct.
These suggestions are in line with International Organisation of Securities Commissions (IOSCO) principles which are globally accepted standards for index providers. The Securities and Exchange Board of India (Sebi) has sought comments from public till June 20 on the proposed norms and final regulations will be put in place after taking views of all stakeholders into consideration. In a discussion paper, Sebi said that 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.
Sebi has suggested that 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. The major indices on the NSE are managed by India Index Services and Product Ltd (IISL), a NSE group company, which maintains over 80 equity indices comprising broad-based benchmark indices, sector indices and customised indices. Earlier, rating agency Crisil had a stake in IISL, which it exited in 2013. At BSE, the major indices, including Sensex, are managed by Asia Index Pvt Ltd, a 50-50 joint venture between the exchange and S&P Dow Jones Indices Llc, the world’s largest provider of financial market indices.