BSE index provider errs on ICICI Bank's weight

Asia Index's error last week made Sensex exchange-traded funds rebalance portfolios and incur additional transaction costs

Index provider Asia Index, a venture by S&P Dow Jones Indices and Asia’s oldest stock exchange the BSE, erred in assigning the correct weight to ICICI Bank on the Sensex last week. This lead to a situation of exchange traded funds (ETFs) and a few active mutual funds (MFs) rebalancing their portfolios, incurring additional transaction costs.

Asia Index said it had dropped the investable weight factor (IWF) of ICICI Bank from one to 0.75, after it erroneously excluded 25 per cent of ICICI shares’ underlying depository receipts from the float calculation. This impacted the overall weight of the bank on the Sensex, BSE 100, BSE 200 and BSE 500 constituents. The mistake came to light on September 19 and was rectified a week later on September 26.

IWFs define the available float for a company and are reviewed annually. ICICI Bank has a depositary receipt issued by Deutsche Bank Trust Company Americas which is traded on the New York Stock Exchange. For each American Depository Receipt (ADR), Deutsche Bank Trust Company Americas holds two India-listed shares on behalf of the owners of the ADR. The lender currently contributes about 5.5 per cent to the Sensex weight.

“Since the weight of ICICI Bank went down, we had to sell the stock and buy other constituent stocks. When the mistake was rectified a week later, we had to buy ICICI Bank and sell other stocks. In doing so, we ended up bearing additional transaction cost,” said a fund official, on condition of anonymity. “BSE has apologised for the error,” said a senior fund official.

ETFs, which track an index closely, see price changes through the day as these are traded on the exchange. Sensex ETFs manage assets of about Rs 3,000 crore, with SBI ETF Sensex managing assets of about Rs 2,400 crore. It could not be ascertained how many active funds reshuffled their portfolios as a result of the error. Sources said the sector weights for specific schemes with Sensex or BSE 100 as underlying could have been impacted, prompting some fund managers to rejig a small portion of their portfolios.

“Upon discovery of the error, the S&P BSE index committee reviewed the issue and decided to correct the IWF back to 1 on a going-forward basis. The committee decided to implement the correction as of September 26 in order to give the market reasonable notice of the change. A notification about the change was sent out to the clients on September 19th itself for them to take necessary actions,” said Asia Index, in an emailed response. “We are reviewing our processes and procedures to identify potential checks and reviews that may be added to prevent a similar issue from recurring.”

The senior fund official said index providers cannot afford to make such mistakes and the error should have been rectified immediately. “Even MSCI, which manages 100-200 indices, has a success ratio of nearly 100 per cent,” he added.