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Market Indices in India Rhoda Alexander, P10148

Market Indices in India

Stock Market of India

Introduction Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock).For e.g: ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price. More and more people would want to buy this stock (i.e. high demand) and very few people will want to sell this stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall down. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction. But now, investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. History of the Indian Stock Market - The Origin One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history. 18th Century 1830's 1840's 1850's 1860's 1860-61 East India Company was the dominant institution and by end of the century, busuness in its loan securities gained full momentum Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader Recognition from banks and merchants to about half a dozen brokers Rapid development of commercial enterprise saw brokerage business attracting more people into the business The number of brokers increased to 60 The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India The number of brokers increased to about 200 to 250 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)

1862-63 1865

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Market Indices in India

Pre-Independence Scenario - Establishment of Different Stock Exchanges 1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business. "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay Development of cotton mills industry and set up of many others Establishment of "The Ahmedabad Share and Stock Brokers' Association" Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal "The Calcutta Stock Exchange Association" was formed Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. When recession followed, number of brokers came down to 3 and the Exchange was closed down Establishment of the Lahore Stock Exchange Merger of the Lahore Stock Exchange with the Punjab Stock Exchange Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established Establishment of "The Hyderabad Stock Exchange Limited" "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited"

1875 1880's 1894 1880 - 90's 1908 1920 1923 1934 1936 1937

1940 1944 1947

Post Independence Scenario The depression witnessed after the Independence led to closure of a lot of exchanges in the country. Lahore Estock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were: 1. 2. 3. 4. 5. Bombay Calcutta Madras Ahmedabad Delhi
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Market Indices in India

6. Hyderabad 7. Bangalore 8. Indore Many more stock exchanges were established during 1980's, namely: 1. Cochin Stock Exchange (1980) 2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982) 3. Pune Stock Exchange Limited (1982) 4. Ludhiana Stock Exchange Association Limited (1983) 5. Gauhati Stock Exchange Limited (1984) 6. Kanara Stock Exchange Limited (at Mangalore, 1985) 7. Magadh Stock Exchange Association (at Patna, 1986) 8. Jaipur Stock Exchange Limited (1989) 9. Bhubaneswar Stock Exchange Association Limited (1989) 10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989) 11. Vadodara Stock Exchange Limited (at Baroda, 1990) 12. Coimbatore Stock Exchange 13. Meerut Stock Exchange At present, there are twenty one recognized stock exchanges in India which does not include the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was a sharp increase in number of Exchanges, listed companies as well as their capital

Rhoda Alexander, P10148

Market Indices in India

What is an Index?
An Index is used to give information about the price movements of products in the financial, commodities or any other markets. Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value. Stock market indexes are useful for a variety of reasons. Some of them are:
1. 2. 3. 4. 5.

They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They can be used as a standard against which to compare the performance of an equity fund. It is a lead indicator of the performance of the overall economy or a sector of the economy Stock indexes reflect highly up to date information Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management

Features of an index
Impact Cost Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size, at any given point of time. Impact cost is a practical and realistic measure of market liquidity; it is closer to the true cost of execution faced by a trader in comparison to the bid-ask spread. (a) Impact cost is separately computed for buy and sell (b) Impact cost may vary for different transaction sizes (c) Impact cost is dynamic and depends on the outstanding orders (d) Where a stock is not sufficiently liquid, a penal impact cost is applied In mathematical terms it is the percentage mark up observed while buying / selling the desired quantity of a stock with reference to its ideal price (best buy + best sell) / 2. Beta The systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's return in relation to that of the market returns. For all practical purposes, the market returns are measured by the returns on the index (Nifty, Mid-cap etc.), since the index is a good reflector of the market. Total Returns Index Nifty is a price index and hence reflects the returns one would earn if investment is made in the index portfolio. However, a price index does not consider the returns arising from dividend receipts. Only capital gains arising due to price movements of constituent stocks are indicated in a price index. Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need to be factored in the index values. Such an index, which includes the dividends received, is called the Total Returns Index. Total Returns Index reflects the returns on the index arising from (a) constituent stock price movements and (b) dividend receipts from constituent index stock.

Rhoda Alexander, P10148

Market Indices in India

MARKET INDICES IN INDIA

About BSE The Bombay Stock Exchange (BSE), in 1986, came out with a Stock Index-SENSEX- that subsequently became the barometer of the Indian stock market.Of the 23 stock exchanges in the India, BSE is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the total trading volume in the country. Established in 1875, the exchange is also the oldest in Asia. Among the twenty-two Stock Exchanges recognised by the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognised and it is the only one that had the privilege of getting permanent recognition abinitio.

BSE INDICES
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22, 2006. With a view to provide a better representation of the increasing number of listed companies, larger market capitalization and the new industry sectors, BSE launched on 27th May, 1994 two new index series viz., the 'BSE-200' and the 'DOLLEX-200'. BSE-500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSEPSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TECk Index. Over the years, BSE shifted all its indices to the free-float methodology (except BSEPSU index). BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of all BSE indices are updated on real time basis during market hours and displayed through the BOLT system, BSE website and news wire agencies. All BSE Indices are reviewed periodically by the BSE Index Committee. This Committee which comprises eminent independent finance professionals frames the broad policy guidelines for the development and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day maintenance of all indices and conducts research on development of new indices.

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Market Indices in India

About NSE The National Stock Exchange (NSE) was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. India Index Services & Products Ltd. (IISL) India Index Services & Products Limited (IISL), a joint venture between NSE and CRISIL Ltd. (formerly the Credit Rating Information Services of India Limited), was setup in May 1998 to provide a variety of indices and index related services and products for the Indian capital markets. It has a licensing and marketing agreement with Standard and Poor's (S&P), the world's leading provider of investible equity indices, for co-branding equity indices.IISL provides a broad range of services, products and professional index services. It maintains over 80 equity indices comprising broad-based benchmark indices, sectoral indices and customised indices. Many investment and risk management products based on IISL indices have been developed in the recent past, within India and abroad. These include index based derivatives traded on NSE, Singapore Exchange (SGX) and Chicago Mercantile Exchange (CME) and a number of index funds and exchange traded funds.

NSE INDICES
1. S&P CNX Nifty
S&P CNX Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. The total traded value for the last six months of all Nifty stocks is approximately 48.16% of the traded value of all stocks on the NSE Nifty stocks represent about 64.38% of the Free Float Market Capitalization as on March 31, 2011. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.50 lakhs is 0.06%. S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.

2. CNX Nifty Junior

S&P CNX Nifty and the CNX Nifty Junior makes up100 most liquid stocks in India. As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so they are the most liquid of the stocks excluded from the S&P CNX Nifty. The maintenance of the S&P CNX Nifty and the CNX Nifty Junior are synchronized so that the two indices will always be disjoint sets; i.e. a stock will never appear in both indices at the same time. Hence it is always meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock index or portfolio. CNX Nifty Junior represents about 11.99 % of the Free Float Market Capitalization as on Mar 31, 2011. The traded value for the last six months of all Junior Nifty stocks is approximately 14.37% of the traded value of all stocks on the NSE. Impact cost for

Rhoda Alexander, P10148

Market Indices in India

3. CNX 100 CNX 100 is a diversified 100 stock index accounting for 38 sectors of the economy. CNX 100 represents about 75% of the Free Float market capitalization as on Mar 31, 2011. The average traded value for the last six months of all CNX100 stocks is approximately 62.5 % of the traded value of all stocks on the NSE. Impact cost for CNX 100 for a portfolio size of Rs. 50 Lakhs is 0.06%.

4. S&P CNX 500

The S&P CNX 500 is Indias first broad based benchmark of the Indian capital market. The S&P CNX 500 represents about 93.54% of the Free Float Market Capitalization and about 93.53% of the total turnover on the NSE as on March 31, 2011.The S&P CNX 500 companies are disaggregated into 71 industry indices viz. S&P CNX Industry Indices. Industry weightages in the index reflect the industry weightages in the market. For e.g. if the banking sector has a 5% weightage in the universe of stocks traded on NSE, banking stocks in the index would also have an approx. representation of 5% in the index.

5. CNX Midcap
The medium capitalised segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX Midcap Index is to capture the movement and be a benchmark of the midcap segment of the market.

6. Nifty Midcap 50
The primary objective of the Nifty Midcap 50 Index is to capture the movement of the midcap segment of the market. It can also be used for index-based derivatives trading.

7. CNX Smallcap Index

The CNX Smallcap Index is designed to reflect the behaviour and performance of the small capitalised segment of the financial market. The CNX Smallcap Index comprises of 100 tradable, exchange-listed companies.

8. S&P CNX Defty

Almost every institutional investor and off-shore fund enterprise with an equity exposure in India would like to have an instrument for measuring returns on their equity investment in dollar terms. To facilitate this, a new index the S&P CNX DeftyDollar Denominated S&P CNX Nifty has been developed. S&P CNX Defty is S&P CNX Nifty, measured in dollars. Features y Performance indicator to foreign institutional investors, off-shore funds, etc. y Provides an effective tool for hedging Indian equity exposure. y Impact cost of the S&P CNX Nifty for a portfolio size of Rs.50 Lakhs is 0.06% y Provides fund managers an instrument for measuring returns on their equity investment in dollar terms.

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Market Indices in India

9. CNX Midcap 200

The primary objective of the CNX MidCap 200 Index is to capture the movement and be a benchmark of the midcap segment of the market. CNX Midcap 200 represents about 72% of the total market capitalization of the Mid-Cap Universe and about 70% of the total traded value of the Mid-Cap Universe (Mid-Cap Universe is defined as stocks having average six months market capitalization between Rs.75 crores and Rs.750 crores). Industry weightages in the index dynamically reflect industry weightages in the market.

Other indices
CNX IT Index provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market. Companies in this index are those that have more than 50% of their turnover from IT related activities like IT Infrastructure , IT Education and Software Training , Telecommunication Services and Networking Infrastructure, Software Development, Hardware Manufacturers, Vending, Support and Maintenance. CNX Bank Index is an index comprised of the most liquid and large capitalised Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. The index will have 12 stocks from the banking sector which trade on the National Stock Exchange. CNX FMCG Index is a 15 stock Index from the FMCG sector that trade on the National Stock Exchange. CNX MNC Index comprises 15 listed companies in which the foreign shareholding is over 50% and / or the management control is vested in the foreign company. CNX Service Sector Index is 30 stocks index and includes companies belonging to services sector like Computers Software, IT Education and Training, Banks, Telecommunication services, Financial Institutions, Power, Media, Courier, Shipping etc. S&P CNX 500 Equity Index is desegregated into 71 Industry sectors which are separately maintained by IISL. The industry indices are derived out of the S&P CNX 500 and care is taken to see that the industry representation in the entire universe of securities is reflected in the S&P CNX 500. e.g., if in the entire universe of securities, Banking sector has a 5% weightage, then the Banking sector (as determined by the Banking stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500. The Banking sector index would be derived out of the Banking stocks in the S&P CNX 500.

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Market Indices in India

Customised Indices
IISL undertakes development & maintenance of customised indices for clients as well as offers consultancy services for developing indices. Customised indices can be used for tracking the performance of the clients portfolio of stocks vis--vis objectively defined benchmarks, or for benchmarking NAV performance to customised indices. The customised indices can be sub-sets of existing indices or a completely new index. Some of the indices that can be constructed include: Sector Indices, Individual Business Group Indices, Portfolios & Industry Indices CNX Energy sector Index will include companies belonging to Petroleum, Gas and Power sub sectors. It represents about 80% of the market capitalization and 60.10% of turnover of the last six months for the period ended March 31, 2011 of the Energy Sector Universe respectively. CNX Pharma Index capture the performance of the companies in this pharmaceutical sector. It represents about 73.24% of the free float market capitalization and 55.92 % of the aggregate turnover of the last six months for the period March 31, 2011 of the Pharmaceuticals Sector Universe respectively. CNX Infrastructure Index capture the performance of the companies in the infrastructure sector.This include companies belonging to Telecom, Power, Port, Air, Roads, Railways, shipping and other Utility Services providers. PSU Bank Index capture the performance of the PSU banks. CNX Realty Index to synergize the emerging opportunities in the real estate sector along with their Index expertise creating new investment avenues for investors. CNX Dividend Opportunities Index The CNX Dividend Opportunities Index is designed to provide exposure to high yielding companies listed on NSE while meeting stability and tradability requirements. The CNX Dividend Opportunities Index comprises of 50 companies. The methodology employs a yield driven selection criteria that aims to maximize yield while providing stability and tradability. Currently the index comprises of companies from 24 different sectors. S&P CNX Shariah indices are designed to offer investors Shariah-compliant investment solutions. Standard & Poors and India Index Services & Products Ltd. have partnered to bring two major Shariah indices to the Indian market: S&P CNX 500 Shariah and S&P CNX Nifty Shariah.

REFERENCES
http://www.bseindia.com http://www.nseindia.com http://www.appuonline.com http://www.wikipedia.org

Rhoda Alexander, P10148

Market Indices in India

SENSEX
SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

BSE-100 Index
The BSE-100 was formerly known as the BSE National index. This Index has 1983-84 as the base year and was launched in 1989. BSE-100 was shifted to Free-Float methodology effective from April 5, 2004. The base value was fixed at 100 points.

BSE-200 Index
The rapid growth of the market necessitated compilation of a new broad-based index series reflecting the market trends in a more effective manner and providing a better representation of the increased equity stocks, market capitalization as also to the new industry groups. As such, BSE launched on 27th May 1994, two new index series-BSE-200 and Dollex-200. The equity shares of 200 selected companies from the specified and non-specified lists of BSE were considered for inclusion in the sample for `BSE-200'. The selection of companies was primarily been done on the basis of current market capitalization of the listed scrips. Moreover, the market activity of the companies as reflected by the volumes of turnover and certain fundamental factors were considered for the final selection of the 200 companies. The financial year 1989-90 was chosen as the base year because of the price stability exhibited during that year and due to its proximity to the current period.

Dollex Series of BSE Indices

All BSE indices reflect the growth in market value of constituent stocks over the base period in Rupee terms. A need was felt to design a yardstick by which these growth values are also measured in Dollar terms. Such an index would reflect, in one value, the changes in both the stock prices and the foreign exchange variation. This was facilitated by the introduction of a dollar-linked index in which the formula for calculation of index is suitably modified to express the current and base market values in dollar terms. The scope for dollar-linked index emerged from the background of Indian equity markets increasingly getting integrated with global capital markets and the need to assess the market movements in terms of international benchmarks. The dollar-linked indices
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Market Indices in India

are useful to overseas investors, as it helps them measure their 'real returns' after providing for exchange rate fluctuations. Dollex-30, a dollar-linked version of SENSEX, was launched on July 25, 2001 whereas Dollex-200, a dollar-linked version of BSE-200 was launched on May 27, 1994. These indices were initially calculated at the end of the trading session by taking into consideration day's rupee/ US$ reference rate as announced by India 's Central Bank i.e. Reserve Bank of India. BSE introduced Dollex-100, a dollar linked version of BSE-100, on May 22, 2006. Dollex-30, Dollex-100 and Dollex-200 are calculated and displayed through BSE On-line trading terminals (BOLT) by taking into account real-time Re./US$ Exchange rate. The formula for calculating the index is: Dollex = [Index Value(In local currency)* BaseRupeeUS$ rate] /(Current Rupee- US$ rate).

BSE-500
BSE-500, consisting of 500 scrips was started by BSE w.e.f. August 9, 1999. The changing pattern of the economy and that of the market were kept in mind while constructing this index.BSE-500 index represents nearly 93% of the total market capitalization on BSE. BSE500 covers all 20 major industries of the economy. In line with other BSE indices, effective August 16, 2005 calculation methodology was shifted to the free-float methodology.

BSE IPO Index

BSE introduced the new index series - BSE IPO(Base Date: May 3, 2004 & Index Value = 1000) index to track the current primary market conditions in the Indian capital market and measure the growth in investors wealth within a period of two years after listing of a company subsequent to successful completion of initial public offering (IPO).BSE on August 24, 2009 announced the launch of BSE IPO index to track the value of companies for two years after listing subsequent to successful completion of their initial public offering (IPO). BSE continued to introduce index innovations with the launch of the IPO index, by introducing ceiling (capping) on weightings of index constituents. Market capitalisation weightings of index constituents are limited to 20%. If a constituents market capitalization results in a higher weighting, the companys weight is suitably adjusted to ensure that all constituents are restricted to 20% in the index. However, between any rebalancing, weightage of any index constituent can exceed 20%.

BSE TECk Index

The decade of 1990s saw the emergence of the TMT sector as a major force in the Indian economy. The remarkable growth of this sector was reflected in the financial markets. Going by the trading pattern, around 19% of the turnover on the stock exchanges is taking place in TMT sector stocks. These stocks collectively account for 15% of the total market capitalization. The investment interest in technology stocks continues unabated. Recognizing the growing importance of the TMT sector, BSE TECk (Base Date: April 2, 2001 & Index Value=1000) index was launched in 2001.
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Market Indices in India

BSE PSU Index

BSE PSU Index (Base Year: Feb 1, 1999 & Index Value; 1000) was launched on 4 June 2001. This index consists of major Public Sector Undertakings listed on BSE. The BSE PSU Index is displayed on-line on the BOLT trading terminals nationwide. It helps to track the performance of listed equity of PSU companies. It is a suitable benchmark for the Central Government to monitor its wealth on the bourses.

BSE Mid-Cap and BSE Small-Cap Index

BSE introduced the new index series called 'BSE Mid-Cap' index and 'BSE Small-Cap' index to track the performance of the companies with relatively small market capitalization that would exclusively represent the mid and small cap companies listed on the Stock Exchange. BSE-500 index, the broad based index that is considered as a BSE Composite index represent more than 93% of listed universe. The movement of BSE-500 index used to get influenced by companies with large market capitalization and with the result, the need for a separate indicator to capture the trend in the specific class of companies (with lower market capitalisation) was felt. BSE Mid-Cap and BSE Small-Cap index would prove to be a great utility to the investing community as they would truly capture the movement of the segments they are represent (mid and small). Salient feature of these indices are:

y y y y

y y

Base year of these indices would be 2002-2003 Base index value would be 1000 for each of these indices Based on a free-float methodology Constructed on 80%-15%-5% method whereby top 750 companies by average market capitalization and liquidity are categorized under large, mid and small cap segment respectively from the list of eligible universe of BSE. BSE Mid-Cap tracks the performance of scrips between 80 & 95% of 750 companies and BSE Small-Cap index tracks the performance of remaining 5% scrips (95-100%). Number of companies in each of these indices would be variable. On the date of launch (April 11, 2005), these indices comprised of 231 and 425 constituents in BSE Mid-Cap and BSE Small-Cap index respectively. Correlation of 0.98 and 0.93 for BSE Mid-Cap and BSE Small-Cap index respectively with broad based BSE-500 index Constituents of these indices are reviewed on a quarterly basis

Rhoda Alexander, P10148