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Consultation paper on Compliance Standards for Index Providers

Compliance standards for index providers

The Securities and Exchange Board of India has proposed compliance standards for index providers with a view to increase transparency and promote reliability of benchmark determinations. It seeks to provide a broad framework for index providers managing/maintain indices.

Compliance standards for index providers: Background

The International Organization of Securities Commissions (IOSCO) had published a report in July 2013 with a view to creating an overarching framework of Principles for Benchmarks used in the financial markets, proposing standards for financial benchmarks (or indices) based on the international best practices.

The framework promotes reliability and the independence of benchmark administration and addresses quality, governance, transparency, and accountability issues. The IOSCO report doesn’t expect a one-size-fits-all method of framework implementation, neither does it restrict an administrator from adopting its own methodologies or adapting methodologies to changing market conditions.

Several foreign jurisdictions articulated their own framework tailored to the requirements in their respective jurisdiction, in addition to the principle prescribed by the IOSCO.

In light of this, it has been proposed to prescribe compliance standards for index providers to ensure the quality and integrity of the indices administered, maintained or calculated by the index providers.

Index methodology

The fact that the broad market indices is constructed to represent performances of large universe of companies traded on an exchange, the paper gives a high level process summary and stock selection criteria adopted by the index providers in India and international.

Moreover, in respect of some of the indices, the paper also delves in to index methodology with respect to index calculation, stock selection criteria, review of index frequency, etc.

Benchmark indices

As per the paper, the attributes of benchmark indices in India vis-a-vis all listed stocks and notes that both indices (Nifty 50 and Sensex 50) represent the largest and most liquid companies and represents the majority of average free float market capitalization, average total market capitalization and average daily turnover of all traded stocks. Nifty 50 index represents the 50 largest and most liquid companies, and it represents approximately 68% of the average free float market capitalization, whereas Sensex 30 index represents 30 largest and most liquid companies and it represents approximately 59.3% of average free float market capitalization.

Therefore it has been brought that benchmark indices are broadly in line with that of the universe of stocks listed on exchanges in India.

Trends in Sector exposure of Benchmark Indices vis-à-vis all listed stocks

In this aspect, it’s noted that at a broader level, stocks selection is primarily based on market capitalization and liquidity. The prominence of one or two sectors is generally observed across different geographies. A change in the weightage of the sector among the listed space gets reflected in the corresponding benchmark index as well.

Therefore, in a period of time, sectoral representation of stocks in the indices tends to go through a change in line with the overall shape of different sectors in the listed universe.

Norms for benchmarks/benchmark administrators

The paper notes varied practices internationally with respect to benchmarks/ benchmark administrators from the regulatory perspective. It has been observed that in majority of the jurisdictions, the framework is similar to the International Organization of Securities Commission’s principles, but in some of the jurisdictions the requirements for benchmarks/benchmark administrators is binding in nature, whereas in others, the requirements are limited to the benchmarks designated as significant.

Based on the principles of IOSCO and practices observed internationally and suitably for domestic markets, the paper gives a suggestive framework for index providers in India under the following heads:

  • In respect of indices on which any product including derivatives, exchange traded funds, market linked debentures are available or traded on Indian Stock Exchanges.
  • In respect of indices that are constructed on the basis of data provided by the Indian Stock Exchange.
  • In respect of indices that is provided by index providers, which are used by mutual funds to benchmark funds performances or issuance of index funds.

For every heads stated above, the suggested framework casts responsibility on the Indian Stock Exchanges and Asset Management Companies, as applicable, to make sure that the index provider is in compliance with the principles of IOSCO on a continuous basis. 

In respect of the first two points stated above, in addition to ensuring compliance by the index provider with the principles of IOSCO, the stock exchange also needs to assess the impact of any product based on indices on trading in the Indian market.

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Compliance Standards for Index Providers: Public comments

To take into consideration the views of various stakeholders, public comments are solicited on the above mentioned proposal keeping in mind the following:

  • Whether the Compliance Standards for Index Providers will provide a greater level of disclosure, transparency, promote the reliability of benchmark determinations, and address the benchmark governance and accountability mechanisms?
  • Whether above Compliance Standards for Index Providers is sufficient to provide a broad framework for Index Providers while managing/maintaining Indices, including provision for licensing indices in foreign jurisdictions?
  • Whether there is a need for formal regulatory framework for Index Providers?
  • Whether SEBI has to specify certain indices as significant and apply the regulatory framework to only those indices as is done in case of some international jurisdictions?

SEBI[1] has sought public comments until 7th January on whether the suggested Compliance standards for index providers can provide a greater level of disclosure, transparency and whether it can promote reliability of benchmark determinations and address the benchmark governance and accountability mechanisms.


Domestic equity market indices like the Nifty 50 and Sensex 50 prove to be benchmarks for many equity investors. As market performance indicators, a lot is at stake on the indices for investors.  Therefore the consultation paper on Compliance standards for index providers which has been put for public comments, is timely and welcome. The paper seeks to increase index reliability and the representation efficacy of an index.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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