Sebi proposes Rs 20,000 crore threshold to consider a benchmark as 'Significant Indices'

The Securities and Exchange Board of India (SEBI), the primary regulator of India's securities market, has proposed a significant move to enhance the oversight of crucial market benchmarks. This proposal involves setting an Asset Under Management (AUM) threshold of Rs 20,000 crore for an index to be classified as a 'Significant Index'. This initiative marks a crucial step towards strengthening the integrity and transparency of India's financial markets, particularly in an era of growing passive investing.

To understand the significance of this proposal, let's first delve into the background. Market benchmarks, commonly known as indices (like the Nifty 50 or Sensex), are pivotal indicators of market performance. They serve multiple purposes: as gauges of economic health, as underlying assets for a vast array of financial products such as Exchange Traded Funds (ETFs) and index funds, and as performance benchmarks for active fund managers. Given their pervasive influence, the accuracy, reliability, and integrity of these indices are paramount. Historically, while SEBI has regulated various aspects of the capital market, specific, comprehensive regulations for index providers and the designation of 'significant' indices have evolved over time. The increasing popularity of passive investment products, where funds simply track an index, has amplified the need for robust regulation to prevent potential manipulation or conflicts of interest, ensuring investor confidence and market fairness.

What exactly happened? SEBI, through a consultation paper, has put forth a proposal to define 'Significant Indices' based on an AUM threshold. If an index is tracked by investment products (like ETFs, index funds, derivatives) with a collective AUM exceeding Rs 20,000 crore, it would be designated as a 'Significant Index'. This designation would then subject the index and its provider to enhanced regulatory scrutiny, including stricter governance norms, transparency requirements, and potentially independent audits. The move is aligned with global best practices, where major jurisdictions have established frameworks to regulate critical benchmarks.

Several key stakeholders are involved in and affected by this proposal. Firstly, **SEBI** itself is the proponent, aiming to fulfill its mandate of protecting investors and developing the securities market. Secondly, **Index Providers** (such as NSE Indices, Asia Index Private Limited which manages S&P BSE indices, and global players like MSCI or FTSE Russell) are directly impacted. They will face increased compliance burdens, governance requirements, and potentially higher operational costs to meet the new standards. Thirdly, **Asset Management Companies (AMCs)** that offer index-linked products will need to ensure that the benchmarks they track adhere to the 'Significant Index' regulations. Fourthly, **Investors**, both retail and institutional, are perhaps the biggest beneficiaries. Enhanced regulation ensures that the indices their investments track are robust, transparent, and less susceptible to manipulation, thereby protecting their interests. Finally, the **Ministry of Finance** provides overall policy guidance and oversight to SEBI and the financial sector.

This proposal holds immense significance for India. From an economic perspective, it strengthens the financial market infrastructure, making it more resilient and attractive to both domestic and foreign investors. A well-regulated benchmark ecosystem fosters greater trust, which is crucial for capital formation and economic growth. Politically, it showcases India's commitment to robust financial governance and alignment with international regulatory standards, enhancing its global standing. Socially, by safeguarding investor interests, it promotes financial inclusion and encourages broader participation in the capital markets, particularly from retail investors who increasingly opt for passive investment routes. This move is a step towards ensuring that the common investor's savings are protected against systemic risks or malpractices related to benchmark administration.

Historically, SEBI's journey since its establishment in 1988 (and statutory powers granted in 1992 through the **SEBI Act, 1992**) has been one of continuous evolution, adapting to market complexities and global trends. The Act empowers SEBI to regulate stock exchanges, intermediaries, and market products to protect investor interests. This latest proposal can be seen as an extension of SEBI's mandate, specifically addressing the growing importance of indices in the modern financial landscape. While no direct constitutional articles explicitly mention market indices, the spirit of economic justice enshrined in the Preamble and Directive Principles of State Policy (e.g., **Article 39(c)** aiming to prevent concentration of wealth) provides a broader philosophical underpinning for regulatory measures that ensure fair and equitable financial markets. The **Securities Contracts (Regulation) Act, 1956 (SCRA)** also provides a framework for regulating securities contracts and stock exchanges, which indirectly covers the instruments linked to indices.

Looking ahead, the future implications are multi-faceted. We can expect a more standardized and transparent environment for index administration in India. This might lead to some consolidation among smaller index providers who may find it challenging to meet the stringent requirements. For AMCs, there might be a need to re-evaluate their index selection process. Ultimately, it is anticipated to boost investor confidence, encourage further growth in passive investing, and solidify India's position as a mature and well-regulated financial market. The consultation process will allow stakeholders to provide feedback, refining the final regulations to strike a balance between robust oversight and market efficiency. This proactive regulatory stance by SEBI is vital for India's aspirations to become a leading global financial hub.