BSE-S&P Dow Jones split: Index business a laggard in Indian markets

The segment has limited contribution to earnings of parent exchanges

The end of the BSE’s joint venture with global index provider S&P Dow Jones Indices has thrown the spotlight on the index business in India. 

It has been less of a success than the segment’s traction in global markets might have indicated. Large global index providers took in over $2 billion in revenue in the previous year, according to Bloomberg. 

This is a fraction of that in India. Year-on-year growth has been limited and the contribution to exchanges’ earnings is minimal, shows an analysis of financial statements. 

The dominance of active management in India and an inability to monetise data feeds have contributed to the lack of traction for the business, according to analysts.

The contribution to exchange profits was Rs 700 million. This works out to a little more than 3 per cent of the profits of both exchanges in 2017-18, which come in at Rs 21.73 billion. The share is lower than the previous year’s 4.1 per cent. 

Business Standard looked at the earnings of the index arm of the BSE and the National Stock Exchange. Figures were picked up from their annual reports. 

The NSE's index business was through India Index Services & Products Limited (now NSE Indices). The BSE operates through Asia Index Private Limited, a joint venture with global index provider S&P Dow Jones Indices LLC. The BSE operates through Asia Index Private — a joint venture with global index provider S&P Dow Jones Indices LLC.

The index/data services segment as a source of revenue hasn't caught on in India in the same way as it has in the rest of the world, according to Motilal Oswal Securities research analyst Ashish Chopra, pointing to differences in the stages of development of the markets here and globally.  

“Globally, it accounts for a double-digit share of earnings,” he said.

Another analyst who tracks the stock exchange space said passive funds have driven the index business globally. 

Exchange-traded funds hold stocks in line with their index weights. These funds pay a fee to the index-provider, which can be a significant source of revenue. But they are not very large in India.

“In India, it is ... (dominated by) active management,” he said, referring to schemes in which a fund manager looks to a build an index-beating portfolio.

Growth in the index business came in at around 12 per cent in 2017-18. Growth in profits of the exchanges was up more than four times over a larger base. 

“… the impact on profits or on the revenues will be minuscule,” said Ashishkumar Chauhan, managing director and chief executive officer of the BSE, in a quarterly-earnings call with analysts on the end of the joint venture with global index provider S&P Dow Jones Indices. Emails requesting comment from S&P and the BSE did not immediately receive a reply. 

 

Mukesh Agarwal, CEO, NSE Indices said the potential of the business should not be judged by recent growth alone. 

“Average growth in the last 4-5 years has been good. Further, growth in assets under the management of exchange-traded funds to around Rs 1 trillion is a big boost for the industry. The increase in passive funds including ETFs and index-linked funds, coupled in the future with innovation and the launch of new indices, can help the industry grow at a good rate though it may take time to happen,” he said.