SEBI Introduces Regulatory Framework for Index Providers to Enhance Transparency and Accountability

The Securities and Exchange Board of India (SEBI) recently issued the Securities and Exchange Board of India (Index Providers) Regulations, 2024, through a notification dated March 8, 2024. These regulations establish a comprehensive regulatory framework for entities that administer indices in the Indian securities market. The primary reason for their enactment was to foster transparency and accountability in the governance and administration of such indices. The new regulations are set to come into force on the one hundred and eightieth day from their publication in the Official Gazette.

Under the new framework, no entity will be permitted to act as an Index Provider without obtaining a certificate of registration from SEBI, effective from the commencement date of these regulations. An "Index Provider" is defined as a person who controls the creation, operation, and administration of a Benchmark or an Index. Existing entities falling within the scope of these regulations, but not yet registered, may continue their activities for six months from the commencement date, or until their registration application is disposed of if filed within that period. The regulations specifically apply to Index Providers administering "Significant Indices" consisting of securities listed on a recognized stock exchange in India for use in the Indian securities market. However, they do not apply to indices consisting solely of global asset classes or those exclusively for use in foreign jurisdictions. Benchmarks regulated by the Reserve Bank of India, including "Significant Benchmarks" notified under the RBI Act, 1934, are also excluded from the purview of these regulations.

The legislative intent behind these regulations is to address the previously unregulated landscape of index administration, ensuring the integrity and reliability of financial benchmarks crucial for the securities market. The earlier legal position lacked a specific statutory framework governing Index Providers, leading to potential gaps in oversight regarding methodology, governance, and conflict of interest management. The new regulations aim to fill these gaps by introducing stringent eligibility criteria for registration, including a requirement for the applicant to be an incorporated entity with a minimum net worth of twenty-five crore rupees. Stock exchanges or other regulated intermediaries currently undertaking index activities departmentally will be required to form a separate legal entity within two years. The regulations also mandate the establishment of robust governance arrangements, including an Oversight Committee, to protect the integrity of the benchmark determination process and mitigate conflicts of interest. Index Providers are now required to formulate policies for managing conflicts of interest, ensure the quality of index design and methodology, and make these methodologies publicly available.

The legislation provided: “A regulation to provide for a regulatory framework for Index Providers in the securities market with the objective of fostering transparency and accountability in governance and administration of Indices.”

Key obligations introduced include the maintenance of internal controls over data collection, the establishment of an accountability mechanism through a complaint redressal policy, and a dispute resolution mechanism for subscribers. Index Providers must also undergo an assessment of their adherence to the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks by an independent external auditor at least once every two years, with the first assessment due within one year of registration. They are required to submit these reports to SEBI and maintain detailed books of accounts, records, and audit trails for a minimum period of eight years. Furthermore, every Index Provider must appoint a compliance officer responsible for monitoring adherence to the Act, rules, and regulations. The Board retains the power to direct special audits under exceptional circumstances and to take action against Index Providers for contraventions, including under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. The regulations also allow SEBI to grant relaxation from strict enforcement of provisions under certain conditions, such as when requirements are procedural or non-compliance is due to factors beyond the entity's control.

Keywords: SEBI, Index Providers, Regulations, Securities Market, Financial Benchmarks, Transparency, Accountability, Governance, Capital Markets, India

Geo Tags: India, Maharashtra District: Not Applicable