SEBI's Index Proposal Tackles Governance, Leaves Competition Unaddressed

India's passive mutual fund industry has grown to ₹12.2 trillion in 2025 from ₹1.91 trillion in 2019, transforming index companies from neutral scorekeepers into systemic market infrastructure. Nearly seven in ten retail investors now hold index-linked products, and passive funds make up 17% of the entire mutual fund industry. Yet until March 2024, the benchmarks guiding this ₹12-trillion ecosystem operated without direct oversight from the Securities and Exchange Board of India. The regulator's recent consultation paper aims to change that.

SEBI defines "significant indices" as benchmarks tracked by ₹200 billion or more in mutual fund assets, mandating their providers register within six months. That threshold captures 47 benchmarks. The rules target governance gaps investors have lived with for years, where index companies with skin in the game make opaque decisions about which securities get included and why.

But SEBI's framework also exposes a market-structure problem hiding beneath the governance narrative. Those 47 benchmarks sit across just three companies. NSE Indices Limited runs 31 of them, BSE Index Services has eight, and CRISIL controls another eight. NSE commands 66% of significant indices, while BSE and CRISIL hold 17% each.

Thriving Oligopoly
This concentration matters because indices now wield real market power. When benchmarks rebalance, automatic buying and selling ripples across ₹12 trillion in passive assets. Inclusion and exclusion decisions no longer merely reflect market movements; they actively drive them. Fund managers exercise little discretion. Index committees and constituent rules make the critical calls.

Market segmentation makes the structure obvious. NSE Indices dominates equity benchmarks through the Nifty family while also controlling debt and hybrid indices. BSE Index Services retains legacy strength via the Sensex and sectoral benchmarks. CRISIL has carved out a niche in debt and hybrid indices across duration categories. Each has secured domain dominance rather than competing head-to-head.

Network effects and ownership together lock this structure in place. Asset managers choose familiar benchmarks because liquidity and performance histories already exist, while investors gravitate to recognisable names. That preference reinforces incumbents. Exchange ownership deepens the moat further. The National Stock Exchange of India and BSE control the trading platforms and clearing systems that feed their index businesses, generating constituent data, volumes and corporate actions in-house. Index calculation becomes a downstream processing task rather than a standalone business. Third-party providers must license the same data, creating structural cost disadvantages that go well beyond methodology or governance.

Network effects explain why the incumbents stay strong, but not why no one else can even get started. The odds are stacked against new players, beginning with data. Any new index needs prices, volumes and corporate actions. NSE and BSE generate all of this in-house as they run their exchanges. Anyone trying to compete has to buy the same feed from them, paying for inputs their rivals treat as a byproduct. Then comes distribution. Fund houses shy away from benchmarks investors do not recognise. Investors avoid funds linked to indices that lack liquid futures for hedging. Derivatives never develop without volume, and volume never comes without investors. No one wants to be first through the door.

Finally, the rules themselves create a trap. Crossing ₹200 billion triggers compliance costs that only make sense at scale. Scale needs fund adoption. Adoption depends on liquidity. Liquidity depends on scale. There is no obvious entry point.

In practice, the structure does not simply favour NSE, BSE and CRISIL, it quietly ensures that no one is in a position to dislodge them.

SEBI's governance objectives quietly clash with competition policy. Mandatory registration, oversight committees, methodology disclosures and grievance frameworks improve transparency. But compliance imposes fixed costs that favour scale players and deter challengers. Once an index crosses the ₹ 200-billion threshold, costs rise while scale advantages deepen. Below it, no regulatory norms apply—creating incentives to remain small rather than build benchmarks that serve investors better.

Global Context
Globally, benchmark regulation emerged from scandal. Manipulation of LIBOR shattered trust in reference rates and forced regulators to tighten governance after the damage was done. SEBI deserves credit for acting pre-emptively. But early regulation works only if it targets the right problem. Here, the framework sidesteps concentration entirely.

The contrast with international markets is stark. Global investors choose among MSCI, FTSE Russell, S&P Dow Jones and Bloomberg, alongside regional specialists. Overseas frameworks do more than mandate governance; they promote competition through interoperability and methodology licensing that allow multiple calculators to compete on the same benchmarks. SEBI regulates the oligopoly without asking whether three providers adequately serve a ₹12-trillion industry.

Investor Impact
For investors, there are no immediate portfolio changes since the rules target index providers rather than fund strategies. Transparency is the clear gain. Detailed methodology disclosures will finally reveal constituent selection, weighting and rebalancing rules that long remained opaque. A formal grievance mechanism also gives investors recourse for calculation errors, methodology breaches or governance failures.

Compliance costs, however, are unlikely to stay contained. Higher licensing fees can flow through to fund expense ratios, and limited competition leaves asset managers with little bargaining power. Over time, this structure risks turning benchmark choice into a cost centre investor quietly pay for, rather than a competitive service fund houses can shop around for.

The consultation paper analyses governance thoroughly but avoids market structure altogether. There is no assessment of whether concentration risks merit intervention, whether entry barriers should fall rather than rise, or why ₹200 billion is the right cutoff.

Indices regulated by the Reserve Bank of India as Significant Benchmarks remain exempt from SEBI's framework. That avoids dual regulation but creates fragmentation. CRISIL's debt indices require SEBI registration, while RBI-regulated benchmarks of comparable systemic importance do not.

Three companies control roughly 50 benchmarks steering ₹ 12 trillion of investor money. That level of concentration would invite scrutiny in almost any other market segment. Here, it passes largely uncommented.

The unanswered question is whether SEBI wants a well-governed oligopoly or a genuinely competitive index market. The consultation paper improves transparency but risks freezing the current hierarchy by raising entry costs without lowering structural barriers. SEBI’s reform initiative has arrived early, giving it the chance to address concentration risks now rather than waiting until the oligopoly becomes entrenched beyond reform.