Index Provider
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. 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.
Applicability of the SEBI Index Providers Regulations, 2024
SEBI Index Providers Regulations, 2024 are applicable exclusively to Index Providers that administer Significant Indices consisting of securities listed on a recognized stock exchange in India for use in the Indian Securities Market.
Not applicable to:
Index Providers who administer their indices consisting only global asset classes or consisting of global assets and Indian Securities whether for use in Indian Securities market or elsewhere.
Index Providers who administer their indices foe exclusive use in foreign jurisdiction.
Legislation prior to this Regulation
As the Index Providers are intermediaries and fall within the definition of intermediaries provided by the SEBI intermediaries regulation 2008 –
2(g) of SEBI Intermediaries Regulation 2008 defines intermediaries as follows –
“intermediary” means a person mentioned in clauses (b) and (ba) of sub-section (2) of section 11 and sub-section (1) and (1A) of section 12 of the Act and includes an asset management company in relation to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, a clearing member of a clearing corporation or clearing house [, foreign portfolio investors] and a trading member of a derivative segment [or currency derivatives segment] of a stock exchange but does not include [***] foreign venture capital investor, mutual fund, collective investment scheme and venture capital fund;
Clauses (b) and (ba) of sub-section (2) of section 11 of SEBI Act, 1992 –
(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;
(ba) registering and regulating the working of the depositories, [participants], custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;]
Sub-section (1) and (1A) of section 12 of SEBI Act, 1992 –
(1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the [regulations] made under this Act:
(1A) No depository, [participant,] custodian of securities, foreign institutional investor, credit rating agency, or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act:
According to the SEBI Intermediaries Regulation, 2008, Index Providers are a part of these regulations, but these regulations were not enough to regulate the proper functioning and control of the Index Providers. Since, Index Providers are one of the key players of the Securities Market, it was necessary for SEBI to provide the regulations for regulating the functioning and control of the Index Providers. Which came to us as SEBI Index Providers Regulations, 2024.
Key Aspects of SEBI Index Providers Regulations 2024:
These regulations mandate the registration of an Index Providers along with the requisites and eligibility criteria for the registration of an Index Provider.
These regulations provide rules for governance, code of conduct and responsibilities of the Index Providers along with provisions for an Oversight Committee to look after proper implementation of these rules.
These regulations make it mandatory for Index Providers, to form policies and procedures to deal with conflict of interest and protect integrity and independence of various functions performed in connection with determination of indices.
These regulations make it mandatory for Index Providers to establish a control framework for calculating, maintaining, and disseminating the Index which should be documented and made available to board upon request.
These regulations also provide the rules which allows the board to direct Special Audits, along with some obligations on both the Auditor and the Index Providers
These regulations provide the rules for Index Quality and Methodology, Cessation of Index and Internal Controls Over Data Collection.
These regulations provide for appointment of a Compliance Officer who would be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and circulars issued by the SEBI.
These regulations also provide rules for action in case of default committed by an Index Provider in accordance with the SEBI Act and rules and regulations provided thereunder.
These regulations also give some relaxation to the Index Providers through their rule on exemption from strict enforcement.
There are 3 schedules in these regulations:
(1) Schedule I
Form A: Application for grant of certificate of registration
Form B: Certificate of Registration
(2) Schedule 2
Part A: Amount to be paid as fees
Part B: Timeline and mode of payment of fee
(3) Schedule 3
Code of conduct for Index Providers
Conclusion
After going through these regulations on Index Providers, it can be said conclusively that, these regulations provide the Board and other bodies with everything needed for perfect regulation and working of Index Providers. Having one such kind of regulation was mandatory because a lot of trades done by people in the Securities Market are based on the information received from Indices, provided by the Index Providers to the public. If such intermediaries are not regulated in an efficient and strict manner along with some exemptions and relaxations for the intermediaries, the goal of smooth functioning of securities market would be very difficult to achieve.
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