INDEX FUNDS
1.Context
Following a report by U.S based research firm Hindenburg levelling several allegations against the Adani group, global index providers like MSCI are reviewing some of the stocks inclusion in its indices that are replicated by many foreign portfolio managers
2. What are index funds
- With thousands of stock traded in stocks around the world their prices will move in different directions most observers assess a market's general trajectory amid these individual price swings by looking at broader benchmark indices.
- For example, Sensex represents 30 largest and most actively traded stocks on the Bombay Stock Exchange (BSE)
- While economists and governments look at market indices movements as a barometer of the confidence levels in the economy individual investors and fund managers use them as a gauge to compare their own portfolio's performance
- Mutual funds portfolio managers often pitch to prospective investors that their investment strategies have outperformed Sensex or other relevant benchmarks
- For retail investors selecting stocks or mutual fund schemes has always been a challenge
- While index funds and exchange-traded funds (ETF) have been an option for Indian investors for about two decades, they have seen exceptional growth in assets since 2015
- About 16% of the roughly 41 lakh crore assets managed by India's mutual funds are parked in Index funds and ETF
3.How indices are made
- Indices could be based on different industry sectors, size of companies (Small-cap, Mid-cap etc) and quantitative parameters like liquidity and trading volumes and the weightage assigned to each stock in an index may vary based on their market capitalisation or other gauges that index providers adopt
- NSE indices owns and manages over 350indices with 117 ETFs listed in India and 12 ETFs listed abroad using these products benchmarks
- The methodologies usually provide for a review of the index composition or cessation-specific indices owing to factors such as 'exceptional circumstances ' , ' market disruption ' or difficulty in replicating the indices
- However, they are not regulated by SEBI
4.SEBI proposal
Noting the " growing dominance of Index providers due to proliferation"of passive funds that drive capital flows towards assets that are part of particular market index, SEBI has proposed to bring them under its regulatory purview
5.About SEBI
5.1. Background
- Before SEBI came into existence, the Controller of Capital Issues was the regulatory authority; it derived authority from the Capital Issues (Control) Act, 1947.
- In April 1988 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India.
- Initially SEBI was a non-statutory body without any statutory power.
- It became autonomous and given statutory powers by SEBI Act 1992.
5.2. Structure of SEBI
- SEBI Board consists of a Chairman and several other whole-time and part-time members.
- SEBI also appoints various committees, whenever required to look into the pressing issues of that time.
- Further, a Securities Appellate Tribunal (SAT) has been constituted to protect the interest of entities that feel aggrieved by SEBI’s decision.
- SAT consists of a Presiding Officer and two other
- It has the same powers as vested in a civil court. Further, if any person feels aggrieved by SAT’s decision or order can appeal to the Supreme Court.
5.3. Aims associated with SEBI
- To protect the interests of investors in securities and to promote the development of, and regulate the securities market.
- It is the regulator of the securities and commodity market in India owned by the Government of India.
5.4. Functions
- SEBI is primarily set up to protect the interests of investors in the securities market.
- It promotes the development of the securities market and regulates the business.
- SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers, share transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars, underwriters, and other associated people to register and regulate work.
- It regulates the operations of depositories, participants, custodians of securities, foreign portfolio investors, and credit rating agencies.
- It prohibits insider trading, i.e. fraudulent and unfair trade practices related to the securities market.
- It ensures that investors are educated on the intermediaries of securities markets.
- It monitors substantial acquisitions of shares and take-over of companies.
- SEBI takes care of research and development to ensure the securities market is efficient at all times.
5.5. Powers of SEBI
- Quasi-Judicial: SEBI has the authority to deliver judgements related to fraud and other unethical practices in terms of the securities market. This helps to ensure fairness, transparency, and accountability in the securities market.
- Quasi-Executive: SEBI is empowered to implement the regulations and judgements made and to take legal action against the violators. It is also authorized to inspect Books of accounts and other documents if it comes across any violation of the regulations.
- Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the interests of the investors. Some of its regulations consist of insider trading regulations, listing obligations, and disclosure requirements. These have been formulated to keep malpractices at bay. Despite the powers, the results of SEBI’s functions still have to go through the Securities Appellate Tribunal and the Supreme Court of India.
5.6. Other Powers and Functions of SEBI
- SEBI is a quasi-legislative and quasi-judicial body which can draft regulations, conduct inquiries, pass rulings and impose penalties.
- It functions to fulfil the requirements of three categories –
- Issuers – By providing a marketplace in which the issuers can increase their finance.
- Investors – By ensuring safety and supply of precise and accurate information.
- Intermediaries – By enabling a competitive professional market for intermediaries.
- By Securities Laws (Amendment) Act, 2014, SEBI is now able to regulate any money pooling scheme worth Rs. 100 cr. or more and attach assets in cases of non-compliance.
- SEBI Chairman has the authority to order “search and seizure operations”. SEBI board can also seek information, such as telephone call data records, from any persons or entities concerning any securities transaction being investigated by it.
- SEBI perform the function of registration and regulation of the working of venture capital funds and collective investment schemes including mutual funds.
- It also works for promoting and regulating self-regulatory organizations and prohibiting fraudulent and unfair trade practices relating to securities markets.
Source: Hindu
