Sebi to release guidelines for index provider

By: | Published: March 10, 2016 12:45 AM

The Securities and Exchange Board of India (Sebi) is learnt to have finalised the guidelines for index providers — the firms that design and develop benchmark indices for stock exchanges.

The Securities and Exchange Board of India (Sebi) is learnt to have finalised the guidelines for index providers — the firms that design and develop benchmark indices for stock exchanges. These guidelines are expected to be released after the board meeting of Sebi scheduled on March 12, sources told FE.

The guidelines are expected to address issues like avoiding conflict of interest, putting in place sound auditing mechanism and aim at increasing transparency. These guidelines would be in-line with International Organisation of Securities Commissions (IOSCO) principles which are globally accepted standards for index providers. IOSCO is an international body of regulators whose members span 115 jurisdictions and cover 95 % of the global securities markets.

“India is still in a nascent stage when it comes to the business of the index providers. Hence Sebi is likely to come-up with broad based guidelines rather than regulations. One of the key recommendations that could be incorporated in the final blueprint is ensuring index providers don’t have any commercial interest in the company that is being included or excluded from a index,” said an ex-SEBI official on condition of anonymity.

Index providers generate revenue by licensing their benchmark index portfolio to the exchange-traded funds (ETFs) which replicate the index and create a product for investors. However, the size of the ETF industry in India is much smaller than the western economies where investors get tax benefits for investing in ETFs. Market sources said the assets under management of the ETF segment in India was close to $2 billion as on September 2015.

Currently, there is no fixed procedure for modifying an index and all the major indices are reviewed twice in year. The index providers alter them based on criteria like size of the company, liquidity and also based on the sectoral balance required for the index. A stock is dropped if it falls below the threshold specified in the methodology document of that particular index.

A senior manager who works for a top index provider told FE on condition of anonymity that the guidelines wouldn’t impact the index companies much as majority of them have already adopted standards that are in-line with IOSCO recommendations. “We don’t create any product on our indices which has investor money riding on it. We license the index to a product provider who would in turn sells it to investors,” the manager said adding that index providers are already adopting high transparency standards by uploading the research and methodology documents online for public scrutiny.

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