Sebi Proposes New Rules to Govern Major Market Indices

India’s stock market regulator is taking steps to bring more oversight to the companies that create the country’s most important financial benchmarks. The Securities and Exchange Board of India (Sebi) has released a new consultation paper proposing a formal framework for what it calls ‘Significant Indices’. This move aims to improve governance and transparency at index providers.

Defining a “Significant Index”

The core of Sebi’s proposal is a clear, numerical threshold to determine which indexes are systemically important. Sebi has suggested that any benchmark or index with products linked to it that have an Asset Under Management (AUM) of Rs 20,000 crore or more should be classified as a ‘Significant Index’. This is a substantial figure, equivalent to roughly 2.4 billion US dollars.

This AUM-linked definition is crucial. It means the rule targets indexes that have a large amount of public money riding on them. When an index like the Nifty 50 or the Sensex is used as the basis for mutual funds, exchange-traded funds (ETFs), or other investment products, its construction and management directly impact millions of investors.

The Need for Enhanced Governance

Index providers play a quiet but powerful role in modern finance. They decide which companies are included in or excluded from major indexes. These decisions can drive billions of dollars in investment flows as funds that track these indexes automatically buy or sell the underlying stocks. Until now, the governance standards for these providers have been largely self-regulated.

Sebi’s proposal seeks to formalize this oversight. By identifying ‘Significant Indices’, the regulator can ensure the providers behind them have robust governance structures, clear methodologies, and manage conflicts of interest appropriately. This is especially important to maintain market integrity and protect investors who may not fully understand how these influential benchmarks are built and maintained.

Potential Impact on the Market

The immediate effect of this proposal will be felt by major index providers like NSE Indices Ltd. and BSE. Their flagship indexes, which form the backbone of India’s thriving passive investment industry, will almost certainly qualify as ‘Significant’ under the proposed Rs 20,000 crore AUM rule. They will need to ensure their operations comply with Sebi’s forthcoming governance standards.

For investors, the long-term impact should be positive. Increased transparency means the rules for how a company enters or exits a major index will be clearer. It reduces the risk of sudden, unexplained changes that could affect their investments. A well-governed index ecosystem promotes fairness and stability, which are foundations for investor confidence.

Sebi’s consultation paper is now open for feedback from market participants. This proposal marks a significant step in recognizing the critical role index providers play in India’s capital markets and bringing them under a more formal regulatory lens to safeguard the interests of the investing public.