The country’s two major bourses, BSE and the National Stock Exchange (NSE), are betting big on the index development business, currently only a small portion of their overall revenue.
Leading global index and data management entities, however, are worth billions of dollars. “Indices are going to be a key area of development for exchanges. Much of the investment is moving towards this segment and is significant for both diversification and strategic purposes,” said Ravi Varanasi, head of business development at NSE.
The BSE in September 2013 hived off its index development business to Asia Index Private (AIPL), a joint venture between the exchange and S&P Dow Jones Indices. Revenue for the exchange from the sale of market data and information products during 2013-14 was Rs 19 crore; of this, about Rs 1 crore was from AIPL.
As for NSE, the latest data for India Index Services Ltd, its index provider, shows total revenue from market data and information product sales was Rs 20 crore as of March 2011. No separate break-up for the index business was available on the website. Market data includes the daily trade and price movement data of stocks.
In sum, these two operations are a far cry from the $ 2.7 billion valuation at which the London Stock Exchange bought out Russell Investments last year. Russell is a leading index provider.
“There is a new interest in smart beta products which provides a variation to plain vanilla products. As fund managers are looking at more innovative offerings across active and passive strategies, this provides a new option. Index-based investing seems to be gaining interest and hence increasing the business growth potential,” said Koel Ghosh, head (business development), S&P Dow Jones Indices and director of indices sales of AIPL.
For the domestic exchanges, the trading platform and sale of market data are the biggest money spinners. The sale of indices to asset and money managers could also begin to contribute significantly to sales and profitability, believe officials.
The exchanges are working on strategy-based and factor-based indices, to satiate the demand from asset managers looking to make the most in a rising market. Further, as demand rises for derivatives products, they’re looking at launch of derivatives contracts on existing sectoral equity indices. One of the most popular in the latter is the CNX Bank Nifty, a gauge for banking stocks.
However within the Bank Nifty, the valuation difference between private and public banking names had resulted in a demand to create separate indices for each, said market sources. Derivative products on existing indices like the infrastructure and health care segments are also being considered, sources said.
The success of the volatility index, India VIX, is seen as an encouraging sign by the exchanges, which are willing to experiment with the introduction of complex indices based on factors like price momentum. These are popular globally.
This also ties in with the other area of interest, exchange-traded funds. Officials said ETFs, based on indices and one of the biggest products globally, are yet to take off in India. Apart from poor understanding of the product, there is the lack of a large basket of indices to choose from, officials said.
There are about 5,400 products across 60 exchanges already, according to PWC’s report, ‘ETF 2020: Preparing for a new horizon’, issued on Monday. ETFs are expected to account for $ 5 trillion in assets by 2020, added the report.