The Securities and Exchange Board of India (SEBI) has introduced a comprehensive regulatory framework for 'Significant Indices' as part of its ongoing efforts to strengthen governance standards among Index Providers in the securities market. The proposal, outlined in a consultation paper released on Monday, establishes clear criteria and operational guidelines for enhanced oversight of major financial benchmarks.

Definition and Scope of Significant Indices

SEBI has defined "Significant Indices" as those administered by an Index Provider and benchmarked by domestic mutual fund schemes with cumulative Assets Under Management (AUM) exceeding ₹20,000 crore. This threshold-based approach ensures that the regulatory framework captures indices with substantial market influence and investor exposure.

AUM Calculation Methodology

The regulatory framework establishes a detailed methodology for calculating the AUM threshold. The calculation is based on the daily average AUM of domestic mutual fund schemes for each of the past six months, ending on June 30 and December 31 of each year. For mutual fund schemes that track multiple indices, the AUM is allocated proportionally among the tracked indices. In cases involving an "index of indices," the AUM of underlying indices is included based on their respective weights in the composite index.

Registration Requirements and Timeline

Under the proposed framework, providers of identified Significant Indices must submit an application for registration as an Index Provider within six months from the date of issuance of the final circular. However, this registration requirement will not apply to providers whose significant indices are already regulated by the Reserve Bank of India (RBI), avoiding regulatory overlap and duplication.

Enhanced Governance and Grievance Mechanism

The proposal aims to increase transparency and accountability in financial benchmarks through structured governance measures. The grievance redressal mechanism will apply specifically to Significant Indices provided by Index Providers registered with SEBI, ensuring that investor concerns and disputes related to these benchmarks have a formal resolution pathway.

Public Consultation Process

SEBI has invited public comments on the proposed regulatory framework until January 30, demonstrating its commitment to stakeholder consultation in policy development. This consultation period allows market participants, Index Providers, and other stakeholders to provide feedback on the proposed measures before final implementation.

India's algorithmic trading landscape has undergone a fundamental transformation, evolving from an institutional privilege to a regulated standard for retail traders. With SEBI's comprehensive framework now in place, algorithmic trading has moved from grey areas and technical workarounds to a structured, transparent system that is reshaping how retail investors approach futures and options (F&O) markets.

Current Market Penetration and Growth

Algorithmic trading has established commanding market presence across India's financial segments. The sector demonstrates robust growth trajectory supported by regulatory clarity and technological advancement.

SEBI's Regulatory Framework: From Chaos to Structure

The transformation from unregulated third-party applications to SEBI's structured framework represents a paradigm shift. Previously, retail traders relied on informal tools, self-made scripts, and third-party applications without proper oversight or risk management.

SEBI's framework has established comprehensive safeguards and accountability measures:

Accessible Strategy Implementation

The new framework has democratized algorithmic trading through user-friendly platforms offering pre-built strategies. Retail traders no longer require complex coding skills or developer assistance.

Popular strategy categories now include:

• Momentum Strategies: Automated entry during strong price movements
• Trend-Following Models: Long-term trend riding with automated exits
• Options Algorithms: Straddles and strangles trading around volatility
• Multi-Strategy Execution: Simultaneous operation of independent strategies

Performance Verification and Market Integrity

SEBI has established the Past Risk and Return Verification Agency to maintain market credibility through rigorous performance auditing. This verification process ensures accurate representation of historical returns and test results before marketing to investors.

The compliance structure requires brokers to:

• Conduct comprehensive mock testing in live market conditions
• Monitor every live order with anomaly detection
• Enforce risk parameters including daily loss limits and position caps
• Maintain detailed audit trails for regulatory oversight

Industry Transformation and Future Outlook

According to Nitesh Khandelwal, Co-Founder of QuantInsti, the mainstream adoption depends on comprehensive learning tools and robust infrastructure beyond regulatory frameworks. The exchange-led empanelment of algorithm providers, combined with mandatory strategy registration, significantly enhances transparency and investor protection.

The mindset shift among retail traders reflects this transformation - from asking "Which stock should I trade today?" to "Which strategy fits today's market conditions?" This evolution represents a move toward systematic, rules-based decision-making rather than emotional trading responses.

Market Impact and Adoption Trends

The structured approach has eliminated common retail trading pitfalls including emotional decision-making, panic exits, and overtrading. Algorithmic systems execute based on predetermined logic without hesitation or delay, crucial in fast-moving F&O markets where seconds determine profitability.

Retail traders are increasingly adopting multi-strategy approaches, simultaneously running breakout trades on Nifty futures, mean-reversion setups on Bank Nifty options, and hedging strategies on existing holdings. This systematic approach represents a significant evolution from traditional manual trading methods.