When launching a CG Index, two principal choices about its setup must be made. How an index is constructed has important consequences for the level of company commitment and – crucially – the credibility and perception of the index. The two principal choices concern the degree of commitment of index constituents and the company participation model.
- Degree of commitment of companies – Listing Tiers vs. Threshold Indices: There are two basic options with respect to the degree of commitment of One option is to base the index population on those companies reaching a certain rating threshold in an evaluation. The second option is a listing segment. While joining a listing segment is voluntary, adherence to all listing rules becomes a contractual requirement once the segment is joined. To date, such CG segments only exist in Brazil with the Novo Mercado, and Italy with the STAR index for small and medium sized companies.
- Company participation model – Voluntary vs Automatic evaluation: For indices based on rating thresholds, there are two basic models employed by stock exchange Automatic evaluation of all listed or eligible companies whether they want to be assessed or not and voluntary participation of companies, indicating that companies apply to be evaluated. The Mexican IPC Sustentable and the JSE SRI index in South Africa automatically evaluate the eligible universe for example, while the Turkish ISE index relies on companies voluntarily contracting an accredited rating agency to be evaluated.
Relevance of Setup choices: In listing segments, violation of the listing governance criteria triggers deﬁned consequences (review, ﬁnes, and non-monetary sanctions that include eventual delisting), and compliance is monitored continuously. As such they oﬀer a higher degree of commitment and credibility than those indices where companies must reach a predetermined threshold of compliance to join, but are never required to score 100% compliance with the index criteria. Note, however, that the higher degree of credibility is directly tied to the integrity of the stock exchange in enforcing those elevated listing rules.
Indices based on automatic evaluation appear more credible than those based on voluntary application, since companies are not free to choose whether they want their CG practices analyzed. A consequence of voluntary application is often that only companies that can be assured of qualifying will apply. Meanwhile, companies with poor CG practices can simply claim not to be interested and will not suﬀer the embarrassment of a bad CG evaluation. An automatic assessment of all companies in the main index, such as occurs in Mexico and South Africa, carries a stronger message, since evaluation is not voluntary and is therefore a potentially more eﬀective tool for improving governance.
The Rating Universe of the CGRS
Participation in the CGRS will be mandatory for all companies listed on the NSE, currently around 200 companies. This sends a strong message as no company can choose not to participate, since participation in the system is compulsory under NSE listing rules, applying to already as well as newly listed companies. For the objective of raising corporate governance and integrity standards in the country, short of introducing new comprehensive laws and regulations, this is the preferred course of action, especially if the credibility of the CGRS evaluation may be higher than an assumed compliance with special corporate governance listing standards. This setup also ensures that the maximum number of companies, i.e. all listed companies, participate in the process.
Companies qualify for the CGRS by scoring 70% and over from the criteria. All qualifying companies will be quoted in the Corporate Governance Index. In addition, if a qualiﬁed company also meets market capitalization and liquidity requirements it will become part of the Premium Board at the NSE. An index based on the Premium Board and weighted by market cap of the constituent companies will be quoted on the NSE.
 A company must: (1) Have a consistent market capitalization that is equal to or in excess of US$1Billion prior to admission to the Premium Board. (2) Have a minimum free ﬂoat of 20% or value of shares ﬂoated that is equal to or above US$1 Billion and the number of shares representing its issued share capital is equal to or above 10 billion units.