Red Fort, A 15th century UNESCO site in Agra, India
The Red Fort, a 15th-century Unesco World Heritage Site in Agra, India

Who knew lists of shares could be so controversial? As arguments rage over China’s inclusion in MSCI’s suite of indices, the business is opening a second can of worms in India. It has launched a consultation to decide whether to cap the exposure of its indices to countries that try to restrict foreign trading of derivatives based on them.

India’s aim is to encourage more domestic trading of assets. Right now, Singapore is the offshore trading centre for derivatives linked to India. In May, India’s main exchange sued Singapore Exchange (SGX) to stop it launching a new India-linked futures contract. This followed an earlier decision to cut access to data for India-linked products traded abroad. The moves threaten the role of SGX as an important Asian markets hub.

MSCI has condemned the actions as “anti-competitive” and warned data restrictions may disrupt trading. The country’s weight in the $1.6tn emerging market index equates to nearly a month of average trading volume on the Mumbai stock exchange.

A full exclusion could mean selling pressure on the country’s overheated stock market. It would also revoke the international stamp of approval that index inclusion bestows.

The goal of MSCI is to be seen as an objective rulemaker. As a business, it must keep its benchmarks attractive to investors. The company rightly points out that the variety of instruments investors use for trading has broadened in recent years. They customarily include offshore exchange traded funds and derivatives. Investors want to trade cheaply and without too much hassle — they do not want protectionist governments to impose barriers.

The local spat points to a broader moral. Passive investment does not depoliticise investment. Instead, it ups the ante by delegating decisions previously made piecemeal by many investors to a few index companies. Passive investing is forcing them to become activists. Their hefty revenues and margins come with a catch.

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