SEBI Sets ₹20,000 Crore Threshold for Significant Indices

The Securities and Exchange Board of India (SEBI) released a consultation paper to define "significant indices," setting a threshold of ₹20,000 crore. This proposal aims to ensure that the indices used by Mutual Funds are well-governed and regulated. 
A total of 47 major indices have been identified in the consultation paper, based on comments from the Association of Mutual Funds in India (AMFI). Stakeholders are invited to submit their comments by the 10th of February. Any index regulated by the Reserve Bank of India (RBI) will not fall under these regulatory changes; they'll continue to be exempt.

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Purpose and Scope of Proposal

The purpose of this proposal is to establish benchmarks important to Mutual Funds, which operate on "significant" indices, to ensure they have greater oversight of governance and usage. Any complaints against such benchmarks will be directed only to the subscribers to these indices, creating a clearer path for accountability.
This proposal is also intended to strengthen the compliance framework for Index Providers to help the Asset Management (mutual fund) Industry.

Identified Benchmarks

47 benchmarks have been identified as having surpassed the currently defined threshold limit, as a result of discussions between SEBI and AMFI. They are comprised of the most prominent Equity, Debt and Hybrid benchmarks that are used by Mutual Funds.
The RBI-benchmarked benchmarks are omitted from this proposal to avoid dual regulation.

Stakeholder Feedback Window

The Stakeholders have until the 10th of February to provide their feedback. Comments on the impact of the proposed threshold limit can come from both the Industry Associations and the Mutual Funds. Once all feedback has been considered, the final draft of the rules will be created.
The mutual fund industry’s need for and reliance on soundly managed indices are the main drivers behind efforts to promote indices with good governance. The proposed guidelines attempt to strike a balance between governance and efficient market functioning. 

Background on Index Regulations

Benchmarks are established to set a standard for benchmark administration through the Index Providers Regulations. Indices that are deemed significant carry additional compliance obligations, e.g., audits and disclosure of conflicts of interest. The performance of mutual funds is often measured against significant index benchmarks; therefore, the reliability of these benchmarks must be maintained to instil investor confidence.

Mutual Fund Industry Reliance

The mutual fund industry relies heavily on indices to support passive product offerings such as Exchange Traded Funds (ETFs) and index funds. Based on the estimated amount of assets under management (AUM) tracked by the establishment of the threshold at ₹20,000 crores, smaller indices will not be subject to the same regulatory burden.