Regulating global index providers may put MFs in a spot, fear experts

Under the proposed norms, overseas index providers investing in global assets will also be required to comply if they have users in India

The Securities and Exchange Board of India’s (Sebi's) proposed regulatory framework for Index Providers could put domestic mutual funds investing overseas in a spot. Asset managers offering passive products benchmarked to overseas indices may be forced to sever ties with index providers unwilling to comply with local regulations, fear industry experts.

Even if the overseas index providers invest only in global assets but have users in India, which means, if the index is tracked by any mutual fund (MF) scheme, then the proposed rules will apply to them. Many passive MFS in India invest abroad and have these global indices as their benchmarks. Any unwillingness from these firms may restrict these funds from investing.

Industry experts say that many such overseas firms may neither be willing to go for this scrutiny nor lose their discretion in the methodology used.  

At present, index providers like S&P Dow Jones Indices, MSCI, FTSE Russell aren't required to register, and do not fall under any regulatory framework in India. The proposed regulations also mandates the constitution of an oversight committee to review index design, check if it is true to label, and oversee results of the audit.

"There is a chance that some global providers may not be willing to go for enhanced scrutiny in the Indian markets. We have seen a rise in some boutique index providers other than the major indices, and if these proposed norms are approved, then they too will fall under the purview of regulations bringing much needed transparency,” said Pratik Oswal, Head- Passive Funds, Motilal Oswal Asset Management.

Sebi’s consultation paper on index providers, floated on December 28, prescribes provisions for eligibility criteria, compliance, disclosures, periodic audits, and penal action in case of non-compliance or incorrect disclosures. These regulations will be applicable to both domestic and overseas index providers.

These indices are used for benchmarking actively managed mutual funds, or are linked to creation of exchange traded derivatives,  index  funds,  exchange  traded  funds (ETFs)  and  market  linked  debentures  etc.

According to data by Association of Mutual Funds in India (AMFI), as of November 30, 2022, there are a total of 137 index funds with asset under management (AUM) to the tune of Rs 1.23 trillion. Of this, 83 are equity oriented with an AUM of Rs 51,256.50 crore, 46 from debt category with the AUM at Rs 68,957.24 crore, and eight are other index funds accounting for Rs 3,497.58 crore AUM.

There are 40 fund of funds (FoF) investing in overseas active funds with Rs 16,322.72 crore AUM. While with the 9 passive FoFs investing overseas hold an AUM of Rs 4,012.02 crore.

"Currently AMCs don't have much interference in the money management for passive funds. With the regulations, the indexing will be a lot more transparent and streamlined," Oswal added.

While welcoming the initiative to bring index providers under the regulatory purview, industry is of the opinion that the move is aimed at weeding out non-serious or manipulative participants from the industry and bringing transparency in the methodology followed. However, they have also sought more clarity.

"While the consultation paper does clarify that in case the users are based in India, then, the proposed framework will be applicable on the overseas index providers, however, more clarity is needed on its scope and applicability. To begin with, it may be considered to make the new regulatory regime applicable to only certain prominent benchmarks,” said Vivek Agarwal, Partner, Luthra and Luthra Law Offices India.

“Foreign index providers may also face some challenges in finding the right people as we need some clarity on whether it has to be India experience or overseas experience,” said Moin Ladha, Partner, Khaitan & Co.

However, the global index providers Business Standard reached to, denied to comment at this stage.  

At present, the benchmarks and indices tracked by fund managers are owned and managed by entities which are either subsidiaries of stock exchanges or joint venture between an exchange and an index provider, or could be an entity engaged in credit rating.

There are indices designed by the foreign index providers that are tracked by the fund managers in India. 

Under Consultation

• Sebi’s proposed framework prescribes provisions for eligibility criteria, compliance, disclosures, periodic audits, and penal action

• Overseas index providers will also have to register with Sebi if the framework is approved, increasing compliance burden

• Some global index providers may be unwilling to be governed by local norms, say experts

• Many mutual funds investing overseas have global indices as benchmarks

• Currently there is no registration or specific regulation to govern index providers

• Sebi’s step to bring transparency and accountability

• The regulator floated the consultation paper on December 28, comments sought till January 27