What's New :

SEBI to introduce regulatory framework for index providers

  • Category
    Economy
  • Published
    3rd Dec, 2023

Context:

A regulatory framework will be introduced for the index providers to foster transparency and accountability in governance and administration of financial benchmarks in the securities market.

Key Highlights

  • Flexibility for NPO Fundraising
    • Sebi grants flexibility to Not for Profit Organisations (NPOs) in raising funds through the social stock exchange.
    • The minimum issue size for public issuance of Zero Coupon Zero Principal Instruments (ZCZP) on the social stock exchange is reduced to Rs 50 lakh from Rs 1 crore.
  • Regulatory Framework for Index Providers
    • Sebi decides to introduce a regulatory framework for index providers in the securities market.
    • The aim is to enhance transparency and accountability in the governance and administration of financial benchmarks.
  • Public Issuance Changes for NPOs
    • NPOs on the social stock exchange can now issue ZCZP with a reduced minimum size of Rs 50 lakh.
    • This move is expected to facilitate easier fundraising for Not for Profit Organisations.
  • Governance and Transparency Focus
    • Sebi's decision to regulate index providers underscores a commitment to improving governance and transparency in financial benchmarks.
    • The regulatory framework aims to ensure responsible and accountable practices in the administration of indices.
  • Market Development and Social Impact
    • The approval for flexibility in NPO fundraising aligns with efforts to develop the social stock exchange and promote social impact initiatives.
    • These decisions collectively contribute to creating a more conducive environment for both financial markets and socially responsible activities.

Who are market index providers?

  • Index providers are companies that design and calculate indexes.
  • 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.

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.

How they help investors?

  • The process of listing usually determine how stocks can be classified, e.g. are a particular stock a Healthcare or an Oil & Gas stock, or are it a Developed or Emerging market stock.
  • An index allows investors and other stakeholders to get a snapshot/idea of the market.

What are index funds?

  • An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
  • Index funds have lower expenses and fees than actively managed funds.
  • Index funds follow a passive investment strategy.
  • Index funds seek to match the risk and return of the market based on the theory that in the long term, the market will outperform any single investment.

Need for regulation:

SEBI 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. citing their growing dominance due to the “proliferation” of index funds.

The firms associated with investors 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.

As of January 2023, 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.

Significance

  • Portfolios of index funds only change substantially when their benchmark indexes change.
  • Thus, regulating the market index providers could directly impact the index funds.
  • Weighting is a method that balances out the influence of any single holding in an index or a portfolio.

Role of Securities Exchange Board of India (SEBI)   

  • It is the regulator for the securities market in India. It was established in 1988 and given statutory powers on 30 January 1992 through the SEBI Act, 1992.
  • It has empowered to exercise on following areas;
    • To approve by−laws of Securities exchanges.
    • To require the Securities exchange to amend their by−laws.
    • Inspect the books of accounts and call for periodical returns from recognized Securities exchanges.
    • Inspect the books of accounts of financial intermediaries.
    • Compel certain companies to list their shares in one or more Securities exchanges.
    • Registration of Brokers and sub-brokers.

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