The Securities and Exchange Board of India (Sebi) has joined market regulators in other jurisdictions such as the US to tighten the rules on index providers.

On Wednesday, the Sebi board approved a proposal to regulate these entities. The regulation is likely to be along the lines of a consultation paper issued by the market regulator in December.

An analyst from a foreign brokerage said this would increase the accountability of index providers who perform a very crucial role vis-à-vis passively run mutual funds that saw net inflows of more than Rs 1 lakh crore between April and November.

The analyst said Sebi’s move is not surprising since other regulators are also putting in place tighter regulations.

The US Securities and Exchange Commission (SEC) in June last year sought feedback on whether index providers and model portfolio providers should be reclassified from information providers to investment advisers.

Reports say if the US market regulator goes ahead with the move, index providers could be treated the same way as fund managers. Well-known global index providers include S&P Dow Jones Indices, MSCI and FTSE Russell.

Sebi’s consultation paper said several indices that are linked to the creation of financial products such as exchange-traded derivatives, index funds and exchange-traded funds (ETFs) even as the indices are used as benchmarks for actively managed mutual funds.

Index providers also develop customised indices (also known as bespoke indices) that are essentially designed and created at the request of fund managers and tracked by them.

Bespoke indices do not track the broad market but track a group of firms from a particular sector or industry or firms with some specific features.

Sebi’s move to tighten regulations on index providers also comes on account of the strong spread of passive investment schemes.

The passive schemes seek to replicate the performance of an index without requiring any effort on part of the fund manager.

The market regulator had said that while the index providers disclose the methodology of index construction on their websites and there is an element of transparency, it is still possible to exercise ‘discretion’ through changes in methodology resulting in the exclusion or inclusion of a stock in the index or change in the weights of the constituent stocks.