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Sebi plans to regulate index providers

Issues including conflicts of interest, audit requirements may be addressed

The Securities and Exchange Board of India (Sebi) is working on regulations for index providers–entities which design and develop benchmark indices such as the S&P BSE Sensex and the CNX Nifty.

The framework would be aimed at addressing issues such as avoidance of conflicts of interest, creation of a robust audit mechanism and putting in place a whistleblower framework to red flag wrongdoing.

Work on the same is ongoing, according to a person familiar with the matter. There are already similar guidelines which have been put in place by an international regulatory forum to address potential conflicts of interest, said another person.

The IOSCO (The International Organisation of Securities Commissions) report recommendations making sure that people who create the index do not report to the people who are looking after the commercial interest of the company. It may also include remuneration policies that are not dependent on the levels of the benchmark, as well as a whistleblower mechanism to pick up any transgression early on.

“IOSCO members should encourage implementation of the principles including through regulatory action where appropriate,” said its July 2013 final report entitled ‘Principles for Financial Benchmarks’.

IOSCO is an international organisation of regulators whose member span 115 jurisdictions and cover 95 per cent of the world’s securities market. It had said that member organisations could also look to adopt these to their jurisdictions.

Officials with index providers have suggested that the business largely grows with the growth in exchange traded funds (ETFs) which pay them a fee for creating a portfolio based on their benchmarks. However the ETF market in India is limited.

It currently accounts for less than one per cent of the mutual fund industry’s Rs 12 lakh crore in total assets under management (AUM). These took off after in developed markets such as the United States of America after 401K-like pension plans began to invest in them.

“The exchange traded fund market is limited as of now, but the US too had limited penetration for 10-12 years before the 401K plans resulted in inflows to passive fund management options. In India the indexing space is just about starting to take off and with encouragement from policy makers and regulations there is a good possibility on the growth of passive investment vehicles. It’s still early days for index providers in India but the business holds good prospect though its full potential will be dependent on the growth of more indexed products” said a spokesperson for Asia Index Private Limited.

“Some of the key drivers for the ETF growth in general are increased awareness for the ETFs for passive investments, the Government of India using the ETF route for part of its disinvestment program (CPSE ETF), and improvement in investor sentiment towards equity investments. There has been increased awareness about the ETF category due to the product training and awareness program conducted by the NSE and leading AMCs. Both the retail and institutional categories have been exploring the ETF route for investment,” said a spokesperson for India Index Services & Products (IISL), a subsidiary of NSE Strategic Investment Corporation which helps maintain the Nifty and other indices.

The spokesperson said that AUM of such ETFs has grown 576 per cent over the last one year from Rs 928 crore (as on March 31, 2014) to Rs 6,282 crore (as on Feb 26, 2015).

“Globally there are the IOSCO principles, which form an internationally-consistent approach and have been implemented by large index providers including S&P DJI. They cover best practices for index governance and construction, including such things as the management of conflicts of interests,” said the Asia Index spokesperson.

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Issues including conflicts of interest, audit requirements may be addressed

Securities and Exchange Board of India (Sebi) is working on regulations for index providers

The Securities and Exchange Board of India (Sebi) is working on regulations for index providers–entities which design and develop benchmark indices such as the S&P BSE Sensex and the CNX Nifty.

The framework would be aimed at addressing issues such as avoidance of conflicts of interest, creation of a robust audit mechanism and putting in place a whistleblower framework to red flag wrongdoing.

Work on the same is ongoing, according to a person familiar with the matter. There are already similar guidelines which have been put in place by an international regulatory forum to address potential conflicts of interest, said another person.

The IOSCO (The International Organisation of Securities Commissions) report recommendations making sure that people who create the index do not report to the people who are looking after the commercial interest of the company. It may also include remuneration policies that are not dependent on the levels of the benchmark, as well as a whistleblower mechanism to pick up any transgression early on.

“IOSCO members should encourage implementation of the principles including through regulatory action where appropriate,” said its July 2013 final report entitled ‘Principles for Financial Benchmarks’.

IOSCO is an international organisation of regulators whose member span 115 jurisdictions and cover 95 per cent of the world’s securities market. It had said that member organisations could also look to adopt these to their jurisdictions.

Officials with