Thursday, June 20, 2024

SEBI prepares framework to regulate index providers

“Parliament has entrusted SEBI with protecting investor interests, so it must do whatever it takes to meet that mandate and is moving to regulate index providers,” a senior government official told The Hindu.

“Parliament has entrusted SEBI with protecting investor interests, so it must do whatever it takes to meet that mandate and is moving to regulate index providers,” a senior government official told The Hindu.
| Photo Credit: SHAILESH ANDRADE

The government has squarely put the onus of regulating the practices of market index providers on the Securities Exchange Board of India (SEBI), amid concerns about the safety of passive investors’ savings parked in funds linked to indices that have added or retained several Adani group stocks, despite their meltdown following the Hindenburg Research report.

“The Parliament has entrusted SEBI with protecting investor interests, so it must do whatever it takes to meet that mandate and is moving to regulate index providers,” a senior government official told The Hindu. “The government nominees on its board will place our concerns and views about regulating indices, but we cannot second-guess the regulator or intervene if some indices’ reconstitution or other such issues crop up,” the official added.

SEBI, whose board will meet on Wednesday, had stressed the need for greater oversight on currently unregulated index providers like NSE Indices (a National Stock Exchange subsidiary) and the Asia Index Pvt. Ltd. (a BSE joint venture with Dow Jones), citing their growing dominance due to the “proliferation” of index funds.

A draft regulatory framework for index providers mooted by the market watchdog in December had raised concerns about possible conflicts of interest that could arise in their governance. These firms could “exercise discretion through changes in methodology resulting in exclusion or inclusion of a stock in the index or change in the weights of the constituent stocks” and their decisions can impact the volumes, liquidity and price of such stocks, as well as investors’ returns from index funds, SEBI had cautioned.

As of January, almost 16% of the mutual fund industry’s ₹41 lakh crore assets under management were in index and exchange traded funds (ETFs), including from large investors like the Employees’ Provident Fund Organisation (EPFO) which oversees formal sector workers’ retirement savings.

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