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The regulator points out that stock selection in passive funds is in effect outsourced to the index provider © Bloomberg

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The Securities and Exchange Board of India has unveiled a proposed regulatory framework aimed at creating greater transparency around the operations of local and foreign index providers.

India’s regulator argues that as index providers exercise discretion through changes in methodology that result in the inclusion of a stock in the index or change in the weightings of the index, there should be greater oversight and assessment of the decisions that are made by these companies.

Decisions made by index companies had “a significant impact on the return of the index funds”, the regulator noted in a consultation paper that was launched at the end of December.

“Thus, it can be implied that the role of stock selection being performed by the fund managers of index funds appears to have been delegated to the index providers to a certain degree,” it added.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Exercising discretion in overseeing the index could also create possible conflicts of interest in the governance and administration of indices, Sebi noted.

The Sebi proposals include requiring index providers to create an oversight committee charged with reviewing proposed changes to benchmark methodology, having policies and procedures to oversee conflicts of interest, and publicly disclosing the methodology for index calculation.

Since index providers are not regulated by Sebi, the regulator has proposed requiring index providers offering indices in India to register with it. Index providers will also need a minimum net worth of Rs250mn ($3mn).

Index providers will need a minimum of five years of index administration experience or a minimum of two people with each having at least five years’ experience in running an index provider.

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 consultation notes.

“Further, relevant documents, audit trails etc shall be made readily available to Sebi,” it adds. “This is intended to facilitate Sebi’s ability to access information that might be needed to determine the reliability of a given benchmark determination or to access information that might be needed to investigate misconduct.”

Sebi is seeking comments on its consultation by January 27.

The regulatory framework could be onerous for local funds that track overseas indices if the overseas providers are not prepared to comply with the new Sebi requirements.

There has been increasing attention globally on index providers particularly in the environmental, social and governance space.

With money continuing to pour into passively managed funds last year, there have been calls for greater scrutiny of the outsized role of index providers like MSCI, FTSE and S&P Global.

And as ESG-focused strategies grow in importance, regulators see an even more urgent need to impose more transparency and standardisation of metrics.

In June, the US Securities and Exchange Commission said it would explore whether index providers should be regulated as investment advisers. The European Union already has its own Benchmarks Regulation.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at

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