Market Index Providers

Market Index Providers

Subject: Economy

Section: Capital Market

Concept:

• The Central Government recently put the onus of regulating the practices of market index providers on the Securities Exchange Board of India (SEBI).

Market Index

• A market index is a hypothetical portfolio of investment holdings that represents a segment of the financial market.
• The calculation of the index value comes from the prices of the underlying holdings.

Market Index Providers

• Index providers are those institutions that formulate and manage indices.
• One of the important roles of the index provider is to classify and define markets, as their indices represent a market or a proportion of a market and provide a benchmark of performance for that market or sector.
• They have the responsibility to set the rules that decide what securities to include in each index, how the index will be managed and how securities will be added or removed from that index over time.
• They also usually determine how stocks can be classified, e.g. is a particular stock a Healthcare or an Oil & Gas stock, or is it a Developed or Emerging market stock.
• An index allows investors and other stakeholders to get a snapshot of the market.
• S&P Dow Jones, MSCI, and Bloomberg are some of the globally renowned institutions that provide indices.
• In India, this activity is generally carried out by subsidiaries of stock exchanges. 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 Lied.

Current status of Regulation

• Currently, index providers are outside the purview of SEBI. However, SEBI had issued a code of conduct for them in 2017.
• Currently, exchange platforms and rating agencies offer index services which are widely used by mutual funds and insurance companies to track performance and offer ETFs and index funds.

New Regulatory Framework/Protocol

• All Index Providers (IP) offering services to Indians will have to get themselves registered with SEBI. However, administrators providing benchmarks notified by the Reserve Bank of India will be excluded from this mandatory requirement.
• The index provider should be a legal entity incorporated under the Companies Act in the country of origin, and independent professionals — individual or group of persons — providing index/benchmark services should be considered ineligible.
• IPs must have net worth of at least Rs.25 crore.
• IPs must have at least a 5-year track record in index administration. Alternatively, IPs should have at least two employees, each having minimum 5 years of relevant experience.
• IPs will have to constitute an oversight committee for reviewing existing index design and proposed changes to benchmark methodology. The committee will also oversee audit results and the implementation of audit observations.
• IPs will have to follow policies/procedures to manage conflicts of interest.
• IPs will have to prevent sharing and leakage of any sensitive information.
• IPs will have to document their methodology for index calculation publicly.
• IPs will have to offer a grievance redressal mechanism including an online facility for arbitration between the index provider and customer/client.
• Index providers will also “be assessed by independent external auditors to evaluate adherence to [International Organization of Securities Commissions] principles once in two years.
• The proposed regulations require maintaining all audit records and making them available for SEBI when asked for. This ensures a high degree of governance and accountability from the index providers.
• SEBI proposes that the index providers need to consider all relevant data for creating an index.
• It also needs to exercise enough care and caution to ensure that there is no distortion of the data.
• It needs to exercise due diligence in the onboarding of data submitters.
• And, importantly, the index provider has to ensure that the data submitters source data from only regulated entities and no other sources.
• It ensures the quality and reliability of input materials used in constructing the index.