The Securities and Exchange Board of India (Index Providers) Regulations, 2024 are the name of these regulations. After being published in the Official Gazette on 118th days from 8 march 2024, these regulations have become operative. It seeks to improve accountability and openness in the management of benchmark indices. Because there is some discretion involved in the management of these indices, the market regulators feel that there may be a conflict of interest in the governance and management of these benchmarks and indices. The new framework has been established as a result to tighten oversight of index providers (IPs).

When developing an index or benchmark in collaboration with another party, an IP must define the roles and duties of each partner and create guidelines for its operations in order to facilitate the delivery of the index or benchmark in accordance with the IP's methodology. If parties other than the IPs engage in activities related to the benchmark determination process, the IP must establish a framework to oversee these third-party activities in accordance with the goals of these regulations and arrange for a written agreement that outlines the responsibilities of each party. As these regulations take effect, market players and stakeholders should get acquainted with them in order to help make the Indian securities market more open and responsible.

The recent regulatory changes concerning index providers mandated by the Securities and Exchange Board of India (SEBI) signify a pivotal shift in the financial realm. These alterations, aimed at bolstering transparency, accountability, and efficiency within the IP sector, hold substantial implications for market dynamics.

Through rigorous mandates on index calculation methodologies, governance structures, and disclosure practices, SEBI seeks to safeguard investor interests while fostering equitable competition in the market. These regulations not only cultivate innovation and trust but also fortify the integrity of Indian financial markets on a global scale.

While compliance with these regulations may pose initial challenges such as increased operational costs and adjustments, they ultimately pave the path for a more resilient and credible index ecosystem. Embracing these changes will not only ensure adherence to regulatory standards but also cultivate investor confidence, thereby fostering sustainable growth and development in the Indian financial landscape.

In response to these developments, it is imperative for IPs to actively engage with SEBI and other stakeholders to adeptly navigate the evolving regulatory framework. By embracing principles of transparency, integrity, and innovation, IPs can capitalize on the opportunities presented by these regulations to enhance their market position and contribute to the overall prosperity of the Indian economy.

Role Of IPS:

IPs play crucial roles in the financial markets by creating benchmarks that represent various segments like broad market indices (e.g., S&P 500, FTSE ) or sector-specific indexes (e.g., technology, healthcare). These benchmarks serve as yardsticks for evaluating investment portfolio performance and making informed allocation decisions. Additionally, IPs support the creation of investment products such as Exchange-Traded Funds (ETFs) and index funds, which replicate index performance to offer diversified market exposure.

They also aid in risk management by helping investors monitor market volatility, sector concentrations, and geographic exposures. Furthermore, index providers enhance market efficiency by providing transparent and standardized benchmarks, facilitating accurate pricing of securities and fostering investor confidence in the financial system.

Everything Relating To The New Regulation:
Applicable:
These rules will only apply to IPs that manage significant indices made up of stocks listed on an Indian stock exchange that is recognized for usage in the country's securities market. At present, the fund managers monitor the benchmarks and indexes, which are owned and operated by Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) organizations.

Exception:
IPs who administer:

1. Their indices comprising solely of global asset classes or comprising both global assets and Indian securities for use in the Indian securities market or elsewhere;
2. Their indices for exclusive use in a foreign jurisdiction shall not be subject to these regulations.

The regulations do not apply to benchmarks regulated by the RBI. Additionally, they do not seek to regulate other asset classes such as cryptocurrency or real estate.

Registration Certificate:

The Board may give the registration certificate in Form B of the First Schedule by notifying the applicant. The certificate is valid until the Board suspends or cancels it. If the Board decides not to give the certificate, it must notify the applicant of its decision and the reasons behind it within 30 days.

Oversight Committee:
An IP is required to establish an oversight committee tasked with reviewing the current index design and methodology. This committee ensures that the index accurately represents its name and description. Indexes are critical in stock market trading as they provide investors with a means to assess overall market sentiment.

Responsibility:

• Examine whether the Index's design or computing process needs to be changed because of shifts in the market's dynamics or for any other reason, and consider any suggested adjustments and how they would affect current subscribers or clients;
• Supervise the creation of new financial benchmarks, audit findings, and the implementation of corrective measures suggested by those audits;
• Evaluate the procedures for discontinuing an index;
• Supervise the standard operating procedures for the application of expert judgment;
• Regularly assess the conditions in the underlying interest that the index measures to ascertain whether the interest has experienced structural changes that might necessitate alterations to the methodology's design;
• Analyze whether the technique accurately captures the Index's nomenclature and description, and determine whether the Index lives up to its label.

In Case Of Conflict Of Interest:
To manage conflicts of interest and uphold the independence and integrity of its index determination activities, the IP must establish clear policies and procedures. These policies should cover the identification, disclosure, management, mitigation, or avoidance of conflicts of interest. They must be documented, implemented, and enforced rigorously by the IP. Additionally, the provider needs to create policies that prevent conflicts of interest or personal interests from affecting its responsibilities. Effective controls should be put in place to manage information sharing among staff involved in activities prone to conflicts. Furthermore, employees must comply with all relevant laws and regulations and protect sensitive nonpublic information.

Providing these policies are applicable to everyone involved in the daily governance and operations of calculating and maintaining Indices, as well as anyone in charge of any part of the oversight duty with regard to the Indices.

Control Framework:
An IP must set up a control system for creating, updating, and sharing the index, this system must be documented and made available to the board upon request. The goal of the policy is to encourage and support employees who witness unethical behavior or serious misconduct to report it. The control framework must have an efficient whistleblowing mechanism in place to enable early awareness of potential misconduct. This mechanism must be made available to all employees, including those of the entities that co-developed the index or benchmark or of third parties involved in the benchmark determining process.

Dispute Resolution:

IPs shall establish a dispute resolution mechanism. All claims, disagreements, or disputes between IPs and subscribers resulting from or related to an Index ,IP's activities in the securities market shall be brought before such a mechanism, which may involve mediation, conciliation, arbitration, or both, in accordance with the process determined by the Board..Under these regulations, any subscriber to an IP may pursue grievance remedies.

In Case Of Default:
If an IP violates any of the Act's provisions, Rules, or Regulations, they shall be held accountable under the SEBI (Intermediaries) Regulations, 2008, or the applicable Act provisions and Regulations.

International Index Governance Framework

The European Union (EU) has implemented the EU Benchmark Regulation to address potential conflicts of interest in the process of setting benchmarks. This regulation imposes specific requirements on benchmark administrators, data contributors, and users within the EU. It also extends its scope to cover non-EU administrators whose indices are used within the EU market. Similarly, countries like Australia and Singapore have adopted regulatory frameworks that are similar to India's approach, focusing on overseeing significant or systemically important indices. These regulations aim to enhance transparency, reliability, and integrity in benchmark-setting processes, ensuring market confidence and stability.

Conclusion:
These regulations by the SEBI for IPs represent a significant milestone in India's financial landscape. These regulations aim to improve transparency, accountability, and efficiency in the IP ecosystem. By enforcing stringent requirements on calculation methodologies, governance structures, and disclosure practices, SEBI seeks to protect investor interests and foster fair competition.

Before the Regulations were enacted, IPs operated without a dedicated regulatory framework and had the autonomy to determine their governance practices. Establishing a regulatory regime was necessary to oversee IPs effectively. These Regulations mark another stride toward safeguarding investor interests. Despite initial challenges such as compliance costs, these regulations are expected to strengthen market credibility and spur innovation, ensuring sustainable growth in India's financial markets. They must engage proactively with SEBI and stakeholders to navigate these changes, promoting transparency and integrity to enhance market confidence and contribute to economic stability.