Conceptual School Work on Stock Indices

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Conceptual Schoolwork on StockIndices

WITH

RELIGARE ENTERPRISES LTD.

MOHD MIZBAH UDDIN

(052070133)

Submitted in Partial Fulfillment of the Requirement for

The Award of the Degree of

Master of Business Administration

s

MESCO INSTITUTE OF MANAGEMENT

& COMPUTER SCIENCE(Affiliated to OSMANIA UNIVERSITY)

(Approved by ALL INDIA COUNCIL FOR TECHNICAL EDUCATION)

HYDERABAD

2007-2009


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ACKNOWLEDGEMENT

I take this opportunity to thank each and every one who hasbeen very helpful in accomplishing the present project.

I express my deep gratitude to Senior Consultants M.AMANNAN & M.A MOHSIN who also happens to be my guide forthe present work, nevertheless the whole of the project workdone, is a standing example of his possessed skill. I thank him forhis endeavor.

I take this opportunity to thank Mr.IRFAN AHMED, H.O.Dfor his support and help he had extended for successful executionof the project. I render my sincere thanks to Ms.NARJIS FATIMAand Mrs.KULSUM HASSAN faculty of M.B.A. and the otherfaculty members of MESCO INSTITUTE OF MANAGEMENT ANDCOMPUTER SCIENCES, OSMANIA UNIVERSITY for their efforts inenlightening the subject to us in our M.B.A Course.

I am sincerely thankful to my parents who have always been

motivating me in completing my project work and myfriends for theirCo-operation.

Place: Hyderabad.

Date: (MOHD

MIZBAH UDDIN)


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DECLARATION

I hearby declare that this project work entitled Conceptual Schoolwork

on Stock Indices has been prepared by me. I am submitting this report in

partial fulfillment of the requirement of the degree ofMASTER OF BUSINESSADMINISTRATION from Osmania University.

I also declare that this project work has not been submitted to any other university

for award of any degree or diploma. This project work is entirely compiled by me

and it is original.

Place: Hyderabad

Date: MOHD

MIZBAH UDDIN.


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ABSTRACT

Stock market indices have been used as benchmark to

monitor the share market and to judge their performance. The

indices in financial markets measure changes in the price of

securities like equities, debentures, govt securities etc. a large no

of indices are maintained by the stock exchanges to represent the

entire market. The main problems faced by the investors areregarding interpretation of index values as well as how far the

index is reliable while investing in stock. The idea of an index is to

capture and reflect the impact of particular news on the market.

An ideal index gives up instant reading about how the stock

market perceives the future of the Indian capital market.

This project report entitled Conceptual Schoolwork onStock Indices is a deliberate attempt that aims at studying the

conceptual base of the various indices, witness the uniqueness

and requisites of each index under taken from study and provide

sheer knowledge base and guidance to investors and student in

course of their economic strategies in their near future.

For the collection and accumulation of relevant informationboth primary and secondary sources of information has been

utilized. Some of the data is collected face to face from the

professional staff of Religare Enterprises ltd and much of the data


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is collected from the secondary sources like books, journals,

magazines and through internet on the relevant subject.

Thus stock market indices can be rightly regarded as a

barometer of Indian stock market. They mirror the stock market

behavior with respect to various economic conditions. The

investors can benchmark the returns of their equity portfolios to

one of the two equity market indices the BSE Sensex and the S&PCNX Nifty. The Sensex is the oldest, and was for a very long

time, the only index that tracked the Indian equity market. The

nifty on the other hand, is the newcomer in the Indian market

(1995). As far as stability is concerned nifty is more stable than

Sensex. This is mainly due to improved diversification and better

liquidity position in nifty. Thus Sensex must be made moredynamic and correct benchmark of the Indian equity market.

Investors should be equated and made aware of the concept for

the right selection of index. According to their specifications the

concept should be made more transparent and simple to

understand and also the concept and study of stock market must

be included in the academic syllabus for the students at

graduation level in order to make them real investors and

speculators in future.


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OBJECTIVES OF STUDY:

The stock exchange is the most perfect type of market forsecurities whether govt, semi- govt or non govt. organizations aswell as for shares and debentures issued by joint stockcompanies. Stock exchanges provide liquidity to the listedcompanies. They also provide ready marketability and unequalledfacility for transfer of ownership of stock, shares and securities.

The various indicators of the stock market need a betterunderstanding for healthy survival of the investors in the stockmarket. The study aims to achieve the following objectives.

To study the conceptual base of the various indices.

To study the trends in the various indices.

To study the basis for the classification of each index underthe study.

To make the concept more clear and simple to understand. To calculate the percentage change in market capitalization

value for companies listed in each index taken underconsideration.

To witness the uniqueness and requisites of each indextaken for study.

To provide sheer knowledge base and guidance to investorsand students in the near future.

SCOPE OF THE STUDY


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The scope of the study is to assess the market and to selectsome particular scripts.

To know the various indices of the stock market.

To determine which of the many tools is most efficient andeffective.

All the various calculation methodology of the indices.

To analyze and report the pulse of the market.

METHODOLOGY OF STUDY:

For the preparation of any report the collection of relevant data isvery essential. There are basically two types of data that are used

in the preparation of a report, they are primary and secondarydata.

PRIMARY DATA:

It is collected from the Senior Consultants and other official

members of Religare Enterprises Ltd.

SECONDARY DATA:

It is collected from the secondary sources like books on thissubject, business magazines and through internet.


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LIMITATIONS OF THE STUDY:

Since there are large number of indices under BSE and NSEthe study is confined only to some of the prominent once.

Due to time constraints the study was carried out within 6 to8 weeks.

The source of data collection is limited and confined tosecondary data only.


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The price fluctuations are observed only for a very shortperiod of time. Hence only a similar trend was observed.


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LITERATURE REVIEW


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INTRODUCTION

The price movements in the market as a whole are measured bymarket indicator series. The indicator series constitute acomposite report of the market performance. One popular type ofindicator series is an Index. Stock indices have been used bybenchmarks to monitor the share market and to judgeperformance. Two 19th century mathematicians namely EtenneLespeyres and Hermann Passche first proposed modern indices.Dow Jones industrial average was first equity index published andsince then the different variety of indices have come, there aretwo main type of indices namely Price Index, Quantity Index andvalue index. The price index is most significant as it measureschanges in the level of price of products in the financial,commodities or any other type of market from one period toanother. The indices in financial market measures changes in theprice of securities like equities, debentures, govt securities etc.the most popular index in the financial market is the stock indexor equity index which use a set of stocks that are representativeof the entire market or a specified sector. They measure thechange in the oral behavior of the market or sector over a periodof time. A large number of indices are maintained by the stockexchanges to represent the entire market. The main objective ofthe study is to know the relationship that exists in the variousindices. The main returns and variances are analyzed to find out ifthere are any significant differences among various indices and

also to select the best index. The main problems faced by theinvestors are regarding interpretation of index values as well ashow far the index is reliable while investing in stock that doesntcontribute to index. To replicate the return on entire market ismore expensive and is almost impossible. So for the index study


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to be effective in ideal portfolio should be chosen that has a highdegree of correlation with the market.

ECONOMIC SIGNIFICANCE OF AN INDEX

The ups and downs of the index reflect the changing expectationsof the stock market about future dividends in the Indiascorporate sector. When index goes up it implies that the

expectations of the stock about the prospective dividends in thefuture will be higher than previous dividends. When the prospectof dividends in the future becomes pessimistic the index drops.An ideal index gives up instant reading about how the stockmarket perceives the future of the Indian capital market.

PHILOSOPHY BEHIND INDEX CONSTRUCTION

Price movements in equity are on account of the news related tothe company or news related to the country or economy. The ideaof an index is to capture and reflect the effect of this news on themarket. Diversification is the key for achieving average whereinthe individual stock fluctuations are cancelled out in themovement of index. hence, more the number of scribes thegreater is the combination to reduce risk and to obtain betterdiversification. The most important factor to be considered here isthe equality of scripts rather that number of scripts.

DEFINITION OF AN INDEX:

An index is a number that represent the change in the set ofvalues between a basic time period and another time period.


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A statistical measure of change in an economy or a securitiesmarket. In the case of financial market, an index is essentially animaginary portfolio of securities representing a particular marketor a portion of it. Each index has its own calculation methodology

and is usually expressed in terms of a change from a base value.Thus the percentage change is more important than the actualnumeric value. Indexes measure the ups and downs of stock,bond and some commodities markets, in terms of market pricesand weighting of companies in the index.

DESIRABLE FEATURES OF AN INDEX

An index should consists of such stocks so that it can easilycapture and reflect any effect like certain development in thecompany or something related to Indian industry or economy. Forthis the stock should be traded regularly on the bourse, such thatthe stock price would react immediately to any change that hastaken place. In the same way a company whose stock is nottraded regularly causes an implacable and disproportionatechange in the index thus reducing the accuracy of the index,since index is the good indicator of the market status. Companieswhich are not traded regularly on the exchange are generallyreferred to as liquid stocks E.g.: stock like Wipro and motorindustry companies are thinly traded and only partly reflect thecurrent market sentiments. Thus the first important attribute of agood index is liquidity i.e. narrower the bid ask price the moreliquid the stock. Liquidity is also, being able to buy and sell shareat a price close to current market prices.

REQUISITES OF AN INDEX

Familiarity: The index chosen should preferably be widely knownand accepted. The index must be capable of being a computedrapidly. A long time series study of the index should be available


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which would illustrate the risks return characteristics under avariety of historical conditions.

Representation: The index chosen should include such shares,

which represent a reasonable large number of the other similarshapes with high market capitalization. The index should try tocapture the behavior of large and well-diversified portfolios in thecountry so as to provide price manipulations.

Easy Arbitrage: Shares include should be highly liquid so as tofacilitate easy arbitrage, otherwise no arbitrage band around thefair price of the future would become wide and hedges would bepaying larger penalty for this use of hedging services.

Hedging Effectiveness: A good index is one which gives highhedging effectiveness that is the index should correlate with oneand all portfolios whatever it may be a good index should give avery high risk reduction when a portfolio owner short sells theindex features. The index should adequately reflect market riskhigh hedging effectiveness should be from the viewpoint of themanager, investors, etc.

Regular Updates: Any good index should be reviewed on aregular basis and brought into line with the current economicscenario on the performance of various industries in economy.

Thus changes should be brought frequently in the index.

SELECTION OF SCRIPS IN AN INDEX

The criterion for selection of scripts depends on the philosophyof the index and its objectives. The major selection criterions are

1. Industry representation

2. Market capitalization

3. High liquidity / lower impact cost.


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Most indices attempt to strike a balance between all the threemajor selection factors.

Industry Capitalization: the objective of any index is to be a

proxy for the market. So it imperative that the broad industrysector are entirely replicated in the index too.

Market capitalization: Index providers always strive toensure a maximum coverage of the entire marketcapitalization. As a result within every industry the largestmarket capitalization stocks are selected. However theminimum selection criterion level varies from industry toindustry.

Liquidity by impact cost: it is an important point to note thatthe stocks that are a part of index should be highly liquid. Thereasons are twofold.

a) An illiquid stock has stale prices and this tend to giveflowed value to the index.

b) The entry and exit cost at a particular index is high if thestocks are illiquid. This stock is called as impact cost ofindex. so it should be seen that the impact cost should beas low as possible.

An index that acts as the benchmark of the market has animportant role to play. The index has to be responsive to thechanges in the market place. It should allow for the inclusionof the new industries as well as the exclusion of deadindustries. A benchmark index should also maintain a high

degree of continuity for its effective survival.

STOCK MARKET INDICES:

Stock market indices are the barometers of the stock market. They mirror the stock market behavior. With some 7,000


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Companies listed on the Bombay stock exchange, it is notpossible to look at the prices of every stock to find out whetherthe market movement is upward or downward. The indices Give abroad outline of the market movement and represent the Market.

Some of the stock market indices are BSE Sensex, BSE-200,Dollex, NSE-50, CRISIL-500, Business Line 250 and RBI Indices ofOrdinary Shares.

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 ofstocks, bonds, T-bills and other forms of investments. Stockmarket indexes are meant to capture the overall behavior ofequity markets. A stock market index is created by selecting agroup of stocks that are representative of the whole market or aspecified sector or segment of the market. An Index is calculatedwith reference to a base period and a base index value.

PURPOSE OF STOCK INDICES:

1. Indices help to recognize the broad trends in the market.2. Index can be used as a bench mark for evaluating theinvestors portfolio.3. Indices function as a status report on the general economy.

Impacts of the various economicpolicies are reflected on the stock market.

4. The investor can use the indices to allocate funds rationallyamong stocks.

To earn returns on par with the market returns, he can choosethe stocks that reflect the market movement.

5. Index funds and futures are formulated with the help of theindices. Usually fund managers construct portfolios to emulateany one of the major stock market index. ICICI has floated ICICIindex bonds. The return of the bond is linked with the indexmovement.


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6. Technical analysts studying the historical performance of theindices predict the future movement of the stock market. Therelationship between the individual stock and index predictsthe individual share price movement.

7.They can be used as a standard against which to compare theperformance of an equity fund.

8. Stock indexes reflect highly up to date information.9. Modern financial applications such as Index Funds, Index

Futures, and Index Options play an important role in financialinvestments and risk management

10. Index can be used to trade derivatives and for launching indexbased products and funds.

DISTINGUISHING FACTORS BETWEEN VARIOUS INDICES:The indices are different from each other to a certain extent.Sometimes the Sensex may move up by 100 points but NSE Niftymay move up only 40 points. The main factors that differentiateone index from the other are given below.1. The number of the component stocks2. The composition of the stocks3. The weights

1. The Number of the Component Stocks

The number of stocks in an index influences the capable ofreflecting the market movement. The sensex has 30 scrips likethe Dow Jones Industrial Average in the U.S. At the same timeBSE-100 (National), BSE-200, the Dollex, (dollar equivalent ofBSE-200), the RBI Index (338stocks) and Nifty (50 stocks) are alsowidely used. Private organizations like CRISIL has constructed its

own index and named it as CRISIL - 500. From the aboveexamples it is clear that the number of scrips differs from oneindex to another and hence their movements also vary. BSENational Index is considered to be more representative thanSensex because it has 100 stocks. Out of 100, 22 are quoted onthe BSE and the rest are listed on the BSE and other exchanges.
http://nseindia.com/content/indices/ind_indexfunds.htmhttp://nseindia.com/content/fo/fo_niftyfutures.htmhttp://nseindia.com/content/fo/fo_niftyfutures.htmhttp://nseindia.com/content/fo/fo_niftyoptions.htmhttp://nseindia.com/content/indices/ind_indexfunds.htmhttp://nseindia.com/content/fo/fo_niftyfutures.htmhttp://nseindia.com/content/fo/fo_niftyfutures.htmhttp://nseindia.com/content/fo/fo_niftyoptions.htm


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2. The Composition of the Stocks

The composition of the stocks in the index reflects the marketmovement as well as the macroeconomic changes. The Centre for

Monitoring Indian Economy maintains an index. If often changesthe composition of the index so as to reflect the marketmovements in a better manner. Some of the scrips tradedvolume may fall down and at the same time some other stockmay attract the market interest should be dropped and othersmust be added. Only then, the index would become morerepresentative. In 1993, sensex dropped one company andadded another. In August 1996 sensex was thoroughly revamped.Half of the scrips were changed. The composition of the Nifty waschanged in April 1996 and 1998. Crisils 500 was changed in

November 1996. In October 1998 the Nifty JuniorIndex composition has been changed. Recognizing theimportance of the information technology scrips, they areincluded in the index.

3. The Weights

The weight assigned to each companys scrip also influences the

movement of the index. The indices may be weighted with theprice or value. The Dow Jones Industrial Average and Nikkei StockAverage of 225 scrips to Tokyo stock exchange are weighted withthe price. A weighted index is computed by adding the currentprices of the stocks in the stock exchange and dividing the sumby the total number of stocks. The stocks with high priceinfluence the index more than the low priced stock in the sample.

The number of stocks is usually adjusted

For any stock splits, bonus and right issues. In the value weightedindex the total market value of the share (the number ofoutstanding shares multiplied by the current market price) is theweight. Most of the indices all over the world and in India exceptEconomic Times Ordinary Share Index are weighted with thevalue. The scrip influences the index in proportion to itsimportance in the market. The price changes that occur in scrip


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with heavy market capitalization dominate the changes that occurin the index. The price changes caused by bonus issue or right ofparticular scrip are reflected in the index. With the bonus issue orright issue the number of outstanding shares and their values

used to change. In an unweighted index, all stocks carry equalweights. The price or market volume of the scrip does not affectthe index. The movement of the price is based on the percentagechange in the average price of the stocks in the particular index.Here it assumes that equal amount of money is invested in eachof the stocks in the index. Value Line Average in the US iscalculated without weights but geometric mean is used in thecomputation instead of arithmetic mean.

4. Base year

The choice of base year also leads to variations among the index.The base year differs from each other in the various indices. Thebase year should be free from any unnatural fluctuations in themarket. If the base year in close to the currentyear, the index would be more effective in reflecting the changesin the market movement. At the same time if it is too close, theinvestor cannot make historical comparison. The Sensex has thebase year as 1978-79 and the next oldest one

is the RBI index of ordinary shares with 1980-81 as base year. Thefollowing table gives the summary of major stock market indices.

BSE INDICES:

For the premier stock exchange that pioneered the securitiestransaction business in India, over a century of experience is aproud achievement. A lot has changed since 1875 when 318persons by paying a then princely amount of Re. 1, becamemembers of what today is called Bombay Stock Exchange Limited(BSE).

Over the decades, the stock market in the country has passedthrough good and bad periods. The journey in the 20th century


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has not been an easy one. Till the decade of eighties, there wasno measure or scale that could precisely measure the various upsand downs in the Indian stock market. BSE, in 1986, came outwith a Stock Index-SENSEX- that subsequently became the

barometer of the Indian stock market.The values of all BSE indices are updated every 15 seconds duringmarket hours and displayed through the BOLT system, BSEwebsite and news wire agencies.

All BSE Indices are reviewed periodically by the BSE IndexCommittee. This Committee which comprises eminentindependent finance professionals frames the broad policyguidelines for the development and maintenance of all BSE

indices. The BSE Index Cell carries out the day-to-daymaintenance of all indices and conducts research on developmentof new indices.

SENSEX - The Barometer of Indian Capital Markets:

SENSEX, first compiled in 1986, was calculated on a "MarketCapitalization-Weighted" methodology of 30 component stocksrepresenting large, well-established and financially soundcompanies across key sectors. The base year of SENSEX wastaken as 1978-79. SENSEX today is widely reported in both

domestic and international markets through print as well aselectronic media. It is scientifically designed and is based onglobally accepted construction and review methodology. SinceSeptember 1, 2003, SENSEX is being calculated on a free-floatmarket capitalization methodology. The "free-float marketcapitalization-weighted" methodology is a widely followed index


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construction methodology on which majority of global equityindices are based; all major index providers like MSCI, FTSE,STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal inthe present decade. Right from early nineties, the stock marketwitnessed heightened activity in terms of various bull and bearruns. In the late nineties, the Indian market witnessed a hugefrenzy in the 'TMT' sectors. More recently, real estate caught thefancy of the investors. SENSEX has captured all these happeningsin the most judicious manner. One can identify the booms andbusts of the Indian equity market through SENSEX. As the oldestindex in the country, it provides the time series data over a fairlylong period of time (from 1979 onwards). Small wonder, theSENSEX has become one of the most prominent brands in thecountry.

SENSEX - Scrip Selection Criteria

The general guidelines for selection of constituents in SENSEX are

as follows:1. Listed History: The scrip should have a listing history of at

least 3 months at BSE. Exception may be considered if fullmarket capitalization of a newly listed company ranksamong top 10 in the list of BSE universe. In case, a companyis listed on account of merger/ demerger/ amalgamation,minimum listing history would not be required.

2. Trading Frequency: The scrip should have been traded on

each and every trading day in the last three months at BSE.Exceptions can be made for extreme reasons like scripsuspension etc.

3. Final Rank: The scrip should figure in the top 100 companieslisted by final rank. The final rank is arrived at by assigning75% weightage to the rank on the basis of three-month


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average full market capitalization and 25% weightage to theliquidity rank based on three-month average daily turnover& three-month average impact cost.

4. Market Capitalization Weightage: The weightage of eachscrip in SENSEX based on three-month average free-floatmarket capitalization should be at least 0.5% of the Index.

5. Industry/Sector Representation: Scrip selection wouldgenerally take into account a balanced representation of thelisted companies in the universe of BSE.

6. Track Record: In the opinion of the BSE Index Committee,the company should have an acceptable track record.

BSE MID-CAP AND BSE SMALL-CAP INDEX

BSE introduced the new index series called 'BSE MID-Cap' indexand 'BSE Small-Cap' index to track the performance of companieswith relatively smaller market capitalization.

BSE-500 Index - represents more than 93% of the listed universe.Companies with large market capitalization bias the movement ofBSE-500 index. This necessitated construction of a separateindicator to capture the trend in companies with lower marketcapitalization. Over the years, BSE Mid-Cap and BSE Small-Capindices have proven to be a great utility to the investingcommunity.

Salient feature of these indices are :

Launched in April 2005


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Base year of these indices is 2002-2003 Base index value is 1000 for each of these indices Based on a free-float methodology

Scrips that are classified as Z group, scrips traded under

permitted category and scrips with the trading frequency ofless than 60% days in preceding three months are notconsidered for inclusion in these indices Constructed on 80%-15%-5% method whereby companies

aggregating 98.5% of average market capitalization arecategorized under large, mid and small cap segmentrespectively from the list of eligible universe of BSE.

BSE Mid-Cap tracks the performance of scrips between 80 &95% of aggregate market capitalization and BSE Small-Capindex tracks the performance of remaining 5% scrips (95-

100%). Number of companies in each of these indices is variable. BSE Mid-Cap and BSE Small-Cap index are highly correlated

with broad based BSE-500 index

Constituents of these indices are reviewed on a quarterlybasis

SECTORAL INDICES

BSE also constructs various sectoral indices "Sector Series(90/FF)" as detailed below. All these indices are calculated anddisseminated on BOLT,

BSE's trading terminal on a real time basis. "90/FF" implies thatthe index covers 90% of the sectoral market capitalization and isbased on the

Free-Float methodology.

BSE Sector Series (90/FF) Indices

BSE Auto Index BSE BANKEX BSE Capital Goods Index BSE Consumer Durables Index


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BSE FMCG Index BSE Healthcare Index BSE IT Index BSE Metal Index

BSE Oil & Gas Index BSE Power Index BSE Realty Index

Scrip Selection Criteria for BSE Sectoral Indices

Eligible Universe

Scrips classified under various sectors that are present

constituents of BSE-500 index would form the eligible universe.Trading Frequency

Scrips should have a minimum trading frequency of 90% inpreceding three months.

Market Capitalization

Scrips with a minimum of 90% market capitalization coverage in

each sector based on free-float final rank will form the index.

Buffers

A buffer of 2% both for inclusion and exclusion in the index isconsidered so that movements in and out of the index areminimized.For example, a company can be included in the index only if it

falls within 88% coverage and an existing index constituent

cannot be excluded unlessit falls above 92% coverage. However, the above buffer criterionis applied only after the minimum 90% market coverage issatisfied.


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Index Review Frequency

The BSE Index Committee meets every quarter to discuss index

related issues. In case of a revision in the Index constituents, theannouncement of the incoming and outgoing scrips is made sixweeks in advance of the actual implementation of the revision ofthe Index.

NSE INDICES:

India Index Services & Products Ltd. (IISL)

India Index Services & Products Ltd. (IISL) is a joint venturebetween the National Stock Exchange of India Ltd. (NSE) andCRISIL Ltd. (formerly the Credit Rating Information Services ofIndia Limited). IISL has been formed with the objective ofproviding a variety of indices and index related services andproducts for the capital markets.

IISL has a consulting and licensing agreement with Standard andPoor's (S&P), the world's leading provider of investible equityindices, for co-branding IISL's equity indices.

IISL - Products & Services

IISL offers a wide range of products and services which are keysupport tools for the equity markets. We provide reliable,accurate and valuable data on indices and index related servicesto cater to the needs of various segments of users. Our specialityis indices based on Indian equity markets, which may be used forbenchmarking, trading or research. Use of IISL data or name or

indices requires a license or subscription.

Financial products on IISL Indices

IISL maintains, develops, compiles and disseminates entire gamut


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of equity indices. Licensing is mandatory for tracking theperformance of an IISL Index. Licensing is also required for use ofthe name of IISL or S&P CNX or CNX or any IISL Index. Fees forlicensing would vary according to the type of the product and the

period.

CNX ensures common branding of indices, to reflect the identitiesof both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands forCRISIL, 'N' stands for NSE . The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services.

CNX indices are useful for fund managers, corporates, brokersand all such enterprises connected with investments in the equitymarkets. These indices can be used for tracking the markets,understanding the performance of a company vis-a-vis themarket, determining how an investors portfolio is performing ascompared to the market, trading derivative products and mostimportantly for development of index based funds by mutualfunds.

Customized Indices

IISL undertakes development & maintenance of customizedindices for clients for tracking the performance of the clientportfolio of stocks vis--vis objectively defined benchmarks, or forbenchmarking NAV performance to customized indices. The

customized indices can be sub-sets of existing indices or acompletely new index viz. Sector Indices, Individual BusinessGroup Indices, Industry Indices etc. Charges for this service varydepending on the activity performed by IISL.


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S&P CNX Industry Indices

S&P CNX 500 Equity Index is desegregated into 72 Industrysectors which are separately maintained by IISL. The industry

indices are derived out of the S&P CNX 500 and care is taken tosee that the industry representation in the entire universe ofsecurities is reflected in the S&P CNX 500. e.g., if in the entireuniverse of securities, Banking sector has a 5% weightage, thenthe Banking sector (as determined by the Banking stocks in S&PCNX 500) would have a 5% weightage in the S&P CNX 500. TheBanking sector index would be derived out of the Banking stocksin the S&P CNX 500. The changes to the weightage of varioussectors in the S&P CNX 500 would dynamically reflect thechanges in the entire universe of securities.

S&P CNX Nifty

S&P CNX Nifty is a well diversified 50 stock index accounting for21 sectors of the economy. It is used for a variety of purposessuch as benchmarking fund portfolios, index based derivativesand index funds.

S&P CNX Nifty is owned and managed by India Index Services andProducts Ltd. (IISL), which is a joint venture between NSE andCRISIL. IISL is India's first specialised company focused upon theindex as a core product. IISL has a Marketing and licensingagreement with Standard & Poor's (S&P), who are world leaders inindex services.

The average total traded value for the last six months of allNifty stocks is approximately 53.75% of the traded value ofall stocks on the NSE

Nifty stocks represent about 61.70% of the total marketcapitalization as on Sep 30, 2008. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2

crore is 0.11% S&P CNX Nifty is professionally maintained and is ideal for

derivatives trading
http://nseindia.com/content/indices/ind_niftylist.csvhttp://nseindia.com/content/indices/ind_niftytrading.htmhttp://nseindia.com/content/indices/ind_indexfunds.htmhttp://nseindia.com/content/indices/ind_iisl.htmhttp://nseindia.com/content/indices/ind_iisl.htmhttp://nseindia.com/content/indices/ind_ic_2007.csvhttp://nseindia.com/content/indices/ind_niftymaintenance.htmhttp://nseindia.com/content/indices/ind_niftylist.csvhttp://nseindia.com/content/indices/ind_niftytrading.htmhttp://nseindia.com/content/indices/ind_indexfunds.htmhttp://nseindia.com/content/indices/ind_iisl.htmhttp://nseindia.com/content/indices/ind_iisl.htmhttp://nseindia.com/content/indices/ind_ic_2007.csvhttp://nseindia.com/content/indices/ind_niftymaintenance.htm


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S&P CNX 500

The S&P CNX 500 is Indias first broadbased benchmark of theIndian capital market. The S&P CNX 500 represents about 84.24%of total market capitalisation and about 78% of the total turnoveron the NSE as on March 31,2008.

The S&P CNX 500 companies are disaggregated into 72 industryindices viz. S&P CNX Industry Indices. Industry weightages in theindex reflect the industry weightages in the market. For e.g. if thebanking sector has a 5% weightage in the universe of stockstraded on NSE, banking stocks in the index would also have an

approx. representation of 5% in the index.

CNX Midcap

The medium capitalised segment of the stock market is beingincreasingly perceived as an attractive investment segment withhigh growth potential. The primary objective of the CNX MidcapIndex is to capture the movement and be a benchmark of themidcap segment of the market.

Method of Computation

CNX Midcap is computed using market capitalisation weightedmethod, wherein the level of the index reflects the total marketvalue of all the stocks in the index relative to a particular baseperiod. The method also takes into account constituent changesin the index and importantly corporate actions such as stocksplits, rights, etc without affecting the index value.

Base Date and Value

The CNX Midcap Index has a base date of Jan 1, 2003 and a basevalue of 1000


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Criteria for Selection of Constituent Stocks

The constituents and the criteria for the selection judge theeffectiveness of the index. Selection of the index set is based on

the following criteria :

All the stocks, which constitute more than 5% marketcapitalization of the universe (after sorting the securities indescending order of market capitalization), shall be excludedin order to reduce the skewness in the weightages of thestocks in the universe.

After step (a), the weightages of the remaining stocks in theuniverse is determined again.

After step (b), the cumulative weightage is calculated.

After step (c) companies which form part of the cumulativepercentage in ascending order unto first 75 percent (i.e. uptoto 74.99 percent) of the revised universe shall be ignored.

After, step (d), all the constituents of S&P CNX Nifty shall beignored.

From the universe of companies remaining after step (e) i.e.75th percent and above, first 100 companies in terms ofhighest market capitalization, shall constitute the CNXMidcap Index subject to fulfillment of the criteria mentionedbelow.

Trading Interest

All constituents of the CNX Midcap Index must have a minimumlisting record of 6 months. In addition, all candidates for the Indexare also evaluated for trading interest, in terms of volumes andtrading frequency.

Financial Performance

All companies in the CNX Midcap Index have a minimum track


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record of three years of operations with a positive net worth.

Others

A company which comes out with a IPO will be eligible forinclusion in the index, if it fulfills the normal eligibility criteria forthe index for a 3 month period instead of a 6 month period.

CNX MNC Index

The CNX MNC Index comprises 50 listed companies in which theforeign shareholding is over 50% and / or the managementcontrol is vested in the foreign company.

Selection Criteria

Selection of the index set is based on the following criteria :

1. Company's market capitalisation rank in the universe shouldbe less than 500

2. Company's turnover rank in the universe should be less than500

3. Company's trading frequency should be at least 90% in thelast six months

4. Company should have a minimum track record of 3 years of

operations with a positive networth.

5. A company which comes out with a IPO will be eligible forinclusion in the index, if it fulfills the normal eligibility criteriafor the index for a 3 month period instead of a 6 monthperiod.


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CNX PSE Index

As part of its agenda to reform the Public Sector Enterprises

(PSE), the Government has selectively been disinvesting itsholdings in public sector enterprises since 1991. With a view toprovide regulators, investors and market intermediaries with anappropriate benchmark that captures the performance of thissegment of the market, as well as to make available anappropriate basis for pricing forthcoming issues of PSEs, IISL hasdeveloped the CNX PSE Index, comprising of 20 PSE stocks. TheCNX PSE Index includes only those companies that have over 51%of their outstanding share capital held by the Central Government

and/or State Government, directly or indirectly.Selection Criteria

Selection of the index set is based on the following criteria :

1. Company's market capitalisation rank in the universe shouldbe less than 500

2. Company's turnover rank in the universe should be less than

5003. Company's trading frequency should be at least 90% in the

last six months

4. Company should have a minimum track record of 3 years ofoperations with a positive networth.

5. A company which comes out with a IPO will be eligible forinclusion in the index, if it fulfills the normal eligibility criteriafor the index for a 3 month period instead of a 6 monthperiod.

S&P CNX Defty

Almost every institutional investor and off-shore fund enterprisewith an equity exposure in India would like to have an instrument


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for measuring returns on their equity investment in dollar terms. To facilitate this, a new index the S&P CNX Defty-DollarDenominated S&P CNX Nifty has been developed. S&P CNX Deftyis S&P CNX Nifty, measured in dollars.

Salient Features

Performance indicator to foreign institutional investors, off-shore funds, etc.

Provides an effective tool for hedging Indian equityexposure.

Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2

crore is 0.14% Provides fund managers an instrument for measuring returns

on their equity investment in dollar terms.


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RELIGARE ENTERPRISE LIMITED

RELIGARE, a RANBAXY PROMOTER group company, is one ofthe Indias leading integrated financial services institutions. Thecompany offers a large and diverse bouquet of services rangingfrom equities, commodities, insurance broking, to wealthadvisory, portfolio management services, personal financialservices, investment banking and institutional broking services.

The services are broadly clubbed across three key businessverticals-retail, wealth management and the institutionalspectrum. Religare enterprises limited is the holding company forall its businesses, structured and being operated through varioussubsidiaries.

Religares retail network spreads across the length and breadth of

the country with its presence through more than 900 locationsacross more than 300 cities and towns. Having spread itself fairlywell across the country and with the promise of not resting on itslaurels, it has also aggressively started eyeing globalgeographies.

Recently, Religare has also partnered with AEGON, one of the

largest insurance and pension companies globally, to offer lifeinsurance and mutual fund product in India. The venture shallcombine the international expertise of AEGON with thedistribution strength of Religare.


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Vision and mission

Vision

To build Religare as a globally trusted brand in the financialservices domain and present it as the Investment Gateway ofIndia'.

Mission

Providing complete financial care driven by the core values ofdiligence and transparency.

Brand Essence

Driven by ethical and dynamic processes for wealth creation.

Our Mission:

To achieve success by

Profit

Monitory

Plan

For

Clients

Growth

ProvidingInformation,

Knowledge,

Personal Attention

&Service.

Money making Ideas & Advice,

Powered by World Class

Research


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Religare Commodities Limited

Commodity Broking

Religare Capital Markets Limited

Investment Banking Proposed Institutional Broking

Religare Realty Limited

In house Real EstateManagement Company

Religare Hichens Harrison**

Religare Insurance BrokingLimited

Life Insurance General Insurance Reinsurance

Religare Arts InitiativeLimited

Business of Art Gallery launched - arts-i

Religare Venture CapitalLimited

Private Equity andInvestment Manager

Religare Asset Management*

Joint Ventures

1. AEGON Religare Life Insurance Company.

2. Religare Macquarie Wealth Management Ltd.

3. Vistaar Religare -The Film Fund.


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Other ventures

1. Fortis Healthcare Limited, established in 1996 was founded

on the vision of creating an integrated healthcare deliverysystem. With 22 hospitals in India, including multi-specialty &super specialty centres, the management is aggressivelyworking towards taking this number to a significant level in thenext few years to provide quality healthcare facilities andservices across the nation.

2. Super Religare Laboratories Limited (formerly SRLRanbaxy) within 11 years of inception has become the largest

Pathological Laboratory network in South Asia. It started arevolution in diagnostic services in India by ushering in themost specialized technologies, backed by innovation anddiligence. The current footprint extends well beyond India inthe Middle East and parts of Europe.

3. Religare Wellness Limited (formerly Fortis Healthworld) isone of the leading players in the wellness retail space with a

footprint of over 100 stores across India. The group envisagessetting up a pan India world class retail network of wellnessstores that would provide comprehensive solutions under oneroof.

4. Religare Technova Limited is the holding company for globalIT business of the promoter group, offering Enterprise ITSolutions, Knowledge Management Solutions and softwareproducts and services. Currently with over 1500 employees and

presence in over 10 countries, Religare Technova is poised tobe a leader in the global IT space.

5. Religare Voyages Limited is the holding company for thepromoter groups integrated aviation and travel businesses.

The Air Charter business is one of the largest in the non-


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scheduled space in the country with its own top-of-the-line fleetthat comprises jets, helicopters and turbo props. The travelbusiness is duly accredited for complete management of bothin-bound and out-bound domestic and international travel.

MANAGEMENT TEAM

Mr. Sunil Godhwan (Managing Director & Group CEO,Religare Limited )

Mr. Shachindra Nath (Group Chief Operating Officer, ReligareLimited)

Mr. Anil Saxena (Group Chief Finance Officer, ReligareLimited)

Board of Directors - Religare Enterprises Limited

Mr. Malvinder Mohan Singh (Non Executive Chairman)

Mr. Sunil Godhwani (Managing Director & Group CEO)

Mr. Shivinder Mohan Singh (Non Executive Director)

Mr. Harpal Singh (Non Executive Director)

Mr. Deepak Ramchand Sabnani (Independent Director)

Mr. Padam Bahl (Independent Director)
http://religare.in/management.asp#%23http://religare.in/management.asp#%23http://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#sunil%23sunilhttp://religare.in/management.asp#sunil%23sunilhttp://religare.in/management.asp#shivinder%23shivinderhttp://religare.in/management.asp#harpal%23harpalhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#%23http://religare.in/management.asp#%23http://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#sunil%23sunilhttp://religare.in/management.asp#shivinder%23shivinderhttp://religare.in/management.asp#harpal%23harpalhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinder


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Mr. J. W. Balani (Independent Director)

Ms. Sunita Naidoo (Independent Director)

PRODUCTS OF RELIGARE ENTERPRISES LIMITED

Retail spectrum

Backed by one of the largest retail networks in India with its

presence in more than 1550 locations across more than 460 citiesand towns, Religare caters to a large number of retail clients byoffering all products under one roof through the branch networkand online mode.

Equity Trading

Trading in Equities with Religare truly empowers you for yourinvestment needs. We ensure you have a superlative tradingexperience through -

A highly process driven, diligent approach Powerful Research & Analytics and One of the "best-in-class" dealing rooms

Commodities Trading

Religare Commodities Limited (RCL), a wholly owned subsidiary ofReligare Enterprises Limited was initiated to spearhead Exchange

based Commodity Trading. As a member of NCDEX, MCX andNMCE, RCL, present in 529 locations provides options in both agriand non-agri commodities for Exchange based commodity tradingbacked by incisive dedicated research.

Online Investment Portal
http://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinderhttp://religare.in/management.asp#malvinder%23malvinder


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Religare Online is your single gateway for all your financial needs.Now you not just trade online in Equities, Commodities, apply forIPOs, invest in Mutual Funds, buy Insurance, but also get TradeRewards each time you invest online with our 360 degree portal.

Personal Financial Services

Today, more and more people look up to ways and means whichcan fulfill their financial aspirations such as Savings, Retirementplanning, Tax planning & Wealth planning, etc. All this coupledwith multiple and cut throat competitive offerings makes it very

difficult for an individual to come to a decision and this leads tothe search of a partner who can help an individual understand thecomplex investment instruments and make the best use of themto meet his/her short-term and long-term financial objectives.

Consumer Finance

Religare's Consumer Finance business is operated through itsNBFC arm, Religare Finvest Limited

With the growing opportunities of Consumer Finance in India,Religares Capital Market & Non-Capital Market Lending productsoffer "loans for all your needs".

Insurance Solutions

Religare with one of the largest retail networks in the countryoffers a complete range of insurance solutions though its 100%subsidiary company, Religare Insurance Broking Limited (RIBL).

The company holds a composite broker's license operating in theLife, General and Reinsurance domains.

Wealth spectrum

To provide customized wealth advisory services to high net worthindividuals (HNIs), Religare offers an exceptional selection of


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investment opportunities, in every asset class. Our marketknowledge and formidable resources facilitate wealthacceleration, diversification and capital preservation.

Wealth Management

Religare operates its wealth management business in partnership

with Macquarie through the joint venture - Religare MacquarieWealth Management Limited (a 50:50 joint venture). The JV is acombination of strengths - Macquaries strong global expertisewith Religares strong local insights.

Portfolio Management Services (PMS)

Religare offers PMS to address varying investment preferences.As a focused service, PMS pays attention to details, and portfoliosare customized to suit the unique requirements of investors.

Religare PMS currently extends six portfolio managementschemes, viz Monique, Panther, Tortoise, Elephant, Caterpillar andLeo. Each scheme is designed keeping in mind the varying tastes,objectives and risk tolerance of our investors

Priority Client Group Services (PCGS)

Religare has structured a dedicated and specialist team to caterto the sophisticated investment needs of high-end customers.

The Priority Client Group brings in a "multi asset class" basedinvestment approach backed by a team of dedicated relationshipmanagers and best-in-class dealing capabilities. It strives toencourage clients to think beyond equities.

Arts Initiative


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Today's complex market structures have spun art out of thecocoon of mere aestheticism into a more rooted role as arecognized financial asset, a derivative with immense powers ofwealth generation, equal to those of any brick and mortar

industry. Given this base, it is now for the greater public-drivenorganizations concerned with the well being of art, to ensure thatall the diverse dimensions of art are nurtured and given the rightexposure, so that art permeates more completely into the societalfabric and enriches a wider consciousness.

International Advisory Fund Management Services

Investing in international markets opens avenues for relativelystable investments and diversification.

We at Religare provide our clients an opportunity to invest ininternational equities to scale up investment horizons and toenable them to gain from profits of global majors. An assetallocation module is developed based on the risk-return criteria ofthe investor and on country attractiveness, sector and industry

strength, company strengths and global trends.Institutional spectrum

Institutions, Banks and the Corporate have their own uniqueinvestment needs. Religare recognizes this and strives to offer asuperlative investment experience for institutions and FIIsglobally and would like to be seen as their preferred investmentgateway.

Institutional Broking Services

With the mission to institutionalize and implement a processdriven approach, the Institutional Broking Services at Religarecater to the investment needs of leading corporate houses andinstitutions. Backed by incisive research, this division would liketo be seen as a one stop investment gateway and knowledge


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repository for its clients, servicing their unique and sophisticatedneeds.

Investment Banking

Our Investment Banking business offered through Religare CapitalMarkets Limited (RCML), a wholly owned subsidiary of the holdingcompany, Religare Enterprises Limited, deals in merchantbanking, transaction advisory and corporate finance servicing theCorporate, Entrepreneurs and Investors.

Insurance Advisory

Religare Insurance Broking Limited (RIBL), a Religare Enterprises

Limited venture is one of India's leading insurance broking firms,with one of the largest retail networks in the country. Thecompany holds a composite broker's license operating in the Life,General and Reinsurance domains.

Asset management

Religare (mutual fund)

Religare has acquired Lotus India Asset Management Companyand has rechristened its Asset management business as ReligareAsset Management Company (P) Limited.

Lotus - A leading AMC in India with a total of 1, 79,762 unitholders and AUM of Rs.4556.26 crores. It has 50 SEBI approvedschemes and operations out of 62 offices across 60 cities in India(data as on 30th November, 2008).

Religare Asset Management Company (P) Limited is a whollyowned subsidiary of Religare Securities Limited (RSL), which inturn is a 100% subsidiary of Religare Enterprises Limited.


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ANALYSIS

&

INTERPRETATION


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Free-float methodology refers to an index constructionmethodology that takes into consideration only the free-floatmarket capitalization of a company for the purpose of indexcalculation and assigning weight to stocks in the index. Free-float

market capitalization takes into consideration only those sharesissued by the company that are readily available for trading in themarket. It generally excludes promoters' holding, governmentholding, strategic holding and other locked-in shares that will notcome to the market for trading in the normal course. In otherwords, the market capitalization of each company in a free-floatindex is reduced to the extent of its readily available shares in themarket.

Subsequently all BSE indices with the exception of BSE-PSU index

have adopted the free-float methodology.

Major advantages of Free-float Methodology

A Free-float index reflects the market trends more rationallyas it takes into consideration only those shares that areavailable for trading in the market.

Free-float Methodology makes the index more broad-basedby reducing the concentration of top few companies inIndex.

A Free-float index aids both active and passive investingstyles. It aids active managers by enabling them tobenchmark their fund returns vis- -vis an investible index.

This enables an apple-to-apple comparison therebyfacilitating better evaluation of performance of activemanagers. Being a perfectly replicable portfolio of stocks, aFree-float adjusted index is best suited for the passivemanagers as it enables them to track the index with theleast tracking error.

Free-float Methodology improves index flexibility in terms ofincluding any stock from the universe of listed stocks. This


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improves market coverage and sector coverage of the index.For example, under a Full-market capitalizationmethodology, companies with large market capitalizationand low free-float cannot generally be included in the Index

because they tend to distort the index by having an undueinfluence on the index movement. However, under the Free-float Methodology, since only the free-float marketcapitalization of each company is considered for indexcalculation, it becomes possible to include such closely-heldcompanies in the index while at the same time preventingtheir undue influence on the index movement.

Globally, the Free-float Methodology of index construction isconsidered to be an industry best practice and all major

index providers like MSCI, FTSE, S&P and STOXX haveadopted the same. MSCI, a leading global index provider,shifted all its indices to the Free-float Methodology in 2002.

The MSCI India Standard Index, which is followed by ForeignInstitutional Investors (FIIs) to track Indian equities, is alsobased on the Free-float Methodology. NASDAQ-100, theunderlying index to the famous Exchange Traded Fund (ETF)- QQQ is based on the Free-float Methodology.

Definition of Free-float

Shareholding of investors that would not, in the normal coursecome into the open market for trading are treated as 'Controlling/Strategic Holdings' and hence not included in free-float.Specifically, the following categories of holding are generallyexcluded from the definition of Free-float:

Shares held by founders/directors/ acquirers which hascontrol element

Shares held by persons/ bodies with "Controlling Interest" Shares held by Government as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals Equity held by associate/group companies (cross-holdings) Equity held by Employee Welfare Trusts


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Locked-in shares and shares which would not be sold in theopen market in normal course.

The remaining shareholders fall under the Free-float

category.

Determining Free-float Factors of Companies

BSE has designed a Free-float format, which is filled andsubmitted by all index companies on a quarterly basis. (Formatavailable on www.bseindia.com). BSE determines the Free-floatfactor for each company based on the detailed informationsubmitted by the companies in the prescribed format. Free-floatfactor is a multiple with which the total market capitalization of acompany is adjusted to arrive at the Free-float marketcapitalization. Once the Free-float of a company is determined, itis rounded-off to the higher multiple of 5 and each company iscategorized into one of the 20 bands given below. A Free-floatfactor of say 0.55 means that only 55% of the marketcapitalization of the company will be considered for indexcalculation.

Free-float Bands:

% Free-Float

Free-FloatFactor

% Free-Float

Free-FloatFactor

>0 - 5% 0.05 >50 - 55% 0.55>5 - 10% 0.10 >55 - 60% 0.60

>10 - 15% 0.15 >60 - 65% 0.65>15 - 20% 0.20 >65 - 70% 0.70>20 - 25% 0.25 >70 - 75% 0.75

>25 - 30% 0.30 >75 - 80% 0.80>30 - 35% 0.35 >80 - 85% 0.85>35 - 40% 0.40 >85 - 90% 0.90>40 - 45% 0.45 >90 - 95% 0.95>45 - 50% 0.50 >95 - 100% 1.00


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Index Closure Algorithm

The closing SENSEX on any trading day is computed taking the

weighted average of all the trades on SENSEX constituents in thelast 30 minutes of trading session. If a SENSEX constituent hasnot traded in the last 30 minutes, the last traded price is taken forcomputation of the Index closure. If a SENSEX constituent has nottraded at all in a day, then its last day's closing price is taken forcomputation of Index closure. The use of Index Closure Algorithmprevents any intentional manipulation of the closing index value.

Adjustment for Bonus, Rights and Newly Issued Capital

SENSEX calculation needs to be adjusted for issue of Bonus orRights shares If no adjustments were made, a discontinuity wouldarise between the current value of the index and its previousvalue despite the non-occurrence of any economic activity ofsubstance. At the BSE Index Cell , the base value is adjusted,which is used to alter market capitalization of the component

stocks to arrive at the SENSEX value.

The BSE Index Cell keeps a close watch on the events that mightaffect the index on a regular basis and carries out dailymaintenance of all the 19 Indices.

Adjustments for Rights Issues

When a company, included in the compilation of the index,issues right shares, the free-float market capitalization ofthat company is increased by the number of additionalshares issued based on the theoretical (ex-right) price. Anoffsetting or proportionate adjustment is then made to theBase Market capitalization (see 'Base Market capitalizationAdjustment' below).


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Adjustments for Bonus Issue

When a company, included in the compilation of the index,issues bonus shares, the market capitalization of thatcompany does not undergo any change. Therefore, there isno change in the Base Market capitalization, only the'number of shares' in the formula is updated.

Other Issues

Base Market capitalization adjustment is required when newshares are issued by way of conversion of debentures,mergers, spin-offs etc. or when equity is reduced by way ofbuy-back of shares, corporate restructuring etc.

Base Market capitalization Adjustment

The formula for adjusting the Base Market capitalization is asfollows:

New Marketcapitalization

New Base Market

capitalization=

Old Base Market

capitalizationx

-----------------------------

----------Old Marketcapitalization

To illustrate, suppose a company issues right shares whichincreases the market capitalization of the shares of thatcompany by say, Rs.100 crores. The existing Base Marketcapitalization (Old Base Market capitalization), say, is

Rs.2450 crores and the aggregate market capitalization of allthe shares included in the index before the right issue ismade is, say Rs.4781 crore. The "New Base Marketcapitalization will then be:


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2450 x(4781+100)

-------------------------- =Rs.2501.24

crores4781

This figure of Rs. 2501.24 crore will be used as the BaseMarket capitalization for calculating the index number fromthen onwards till the next base change becomes necessary.

COMPUTATION OF INDEX

Let us take an example of an index with 5 companies A Ltd, B

Ltd, C Ltd, D Ltd and E Ltd. The data of these companies stocks isas follows:

Company Basedateprice(Rs.)

CurrentPrice(Rs.)

No. ofSharesoutstanding

Free float (%)

Free floatFactor

A Ltd 10 20 10000 78 0.80

B Ltd 50 75 1000 63 0.65

C Ltd 100 120 250 92 0.95

D Ltd 1000 800 100 55 0.55

E Ltd 1050 1020 500 32 0.35


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Full market capitalization method:

Base date Market Capital.

A Ltd = 10 x 10,000 = Rs. 1, 00,000

B Ltd = 50 x 1000 = Rs.50, 000

C Ltd = 100 x 250 = Rs.25, 000

D Ltd = 1000 x 100 = Rs.1, 00,000

E Ltd = 1050 x 500 = Rs.5, 25,000

Total = Rs.8, 00,000

to calculate the index let us equate this base date marketcapitalization to the index number 100.

Market capital at current date.

A Ltd = 20 x 10000 = Rs.200000

B Ltd = 75 x 1000 = Rs.75000

C Ltd = 120 x 250 = Rs.30000

D Ltd = 800 x 100 = Rs 80000

E Ltd = 1020 x 500 = Rs.510000

Total = Rs.895000

Thus the index value at the current date =

Current market price = old base market x new marketcapitalization

Capitalization old market capitalization= 895000 x 100 = 112

800000Thus the rise in the index is 12%


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The weight of this companies in the full market capitalizationindex work out to be

A Ltd = 200000 x 100 = 22.34%

895000B Ltd = 75000x 100 = 8.37%

895000

C Ltd = 30000 x 100 = 3.35%895000

D Ltd = 80000 x 100 = 8.93%895000

E Ltd = 510000 x 100 = 56.98%895000

Free float Method :

Base date free float capital

A Ltd = 10 x 10000 x 0.80 = Rs.80000

B Ltd = 50 x 1000 x 0.65 = Rs.32500

C Ltd = 100 x 250 x 0.95 = Rs.23750

D Ltd = 1000 x 100 x 0.55 = Rs.55000

E Ltd = 1050 x 500 x 0.35 = Rs.183750

Total = Rs.870000

Again this value is equated to the index number 100.

Free float capital at current date

A Ltd = 20 x 10000 x 0.80 = Rs.160000

B Ltd = 75 x 1000 x 0.65 = Rs.48750


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C Ltd = 120 x 250 x 0.95 = Rs.28500

D Ltd = 800 x 100 x 0.55 = Rs.44000

E Ltd = 1020 x 500 x 0.35 = Rs.178500

Total = Rs.459750

The index number on the current date works out to be

Current market price = old base market x new marketcapitalization

Capitalization old market capitalization

= 459750 x 100 = 52.84870000

Thus the fall in the index is = 47.16%

The free float weights are as follows :

A Ltd = 160000 / 459750 x 100 = 34.80%

B Ltd = 48750/459750 x 100 = 10.60%

C Ltd = 28500/459750 x 100 = 6.19%

D Ltd = 44000/459750 x 100 = 9.57%

E Ltd = 178500/459750 x 100 = 38.82%

Here it is seen that E Ltd, by virtue of it being closely heldcompany loses its weight in Free float index.

Price Weighted Index

In the price weighted index, the percentage change in price is thedeciding factor of the stocks weightage in the index. Thismethodology takes no note of the market capitalization of the


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individual stocks to decide their Weightages in the index. Thecurrent index price in a price weighted index is calculated by theformula:

P = (Pn Qo/ Po Qo)The following example gives the outstanding shares and prices atindex base date and current date.

Price weighted value at base date = (Qo x Po)

A Ltd = 10 x 10000 = 100000

B Ltd = 50 x 1000 = 50000

C Ltd = 100 x 250 = 25000

D Ltd = 1000 x 100 = 100000

E Ltd = 1050 x 500 = 525000

Total = 800000

This value is again equated to index number 100.

Price weighted value at current date = P = (Pn Qo/ Po Qo)= (20 x 10000 + 75 x 1000 + 120 x 250 + 800 x 100 + 1020 x500)

800000

= 895000 = 112800000

Therefore the percentage increase in the index is 12%.

Full market capital vs Free float capital

Nifty is based on the full market capitalization. Market capital of astock is the market price of the stock multiplied by the totalnumber of shares. The market capital of the index is the totalmarket capital of all its constituent stocks. The base market


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capital of the nifty is Rs.2.06 tn, which is equated to the indexvalue of thousand points. When the nifty touched 2000 pointsrecently, it meant that its market capital doubled to Rs.4.12 tn.

Free float capitalization, the method used for calculating theSensex, uses only that part of the market capitalization of thecompany that is traded freely in the market. It disregards holdingsby promoters, as these shares are not traded in the markets.Hence the index movement represents the traded shares better,as the non traded shares are excluded from the indexmovements.

Now, as to the question of whether free float market

capitalization method is better than the full market capitalizationmethod, there seem to be no definite answer. Many internationalindices like STOXX, The Dow Jones indices and Morgan StanleyCapital International (MSCI) indices are based on free floatmethodology. Free float indices are said to be better reflectors ofmarket movements as they exclude the illiquid and untradedpromoters holdings in their constituent companies. Thus the indexreflects changes in the market that arise from actively traded

share capital.


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Changes in Weightages of Sensex Companies

Company

Name

Rank

Full

Mkt

FullMktCap

(Rs.Cr)

Weights asper

FullMkt(Rs.Cr)

FFFactor

FFMktCap

(Rs.Cr)

Weights asper

FreeFloat

RankFF

Change inWt

Rel 1 406181 18.44 0.50 203091 14.47 1 -3.97NTPC 2 233664 10.61 0.65 151881 10.82 3 0.21ONGC 3 179980 8.17 0.85 152983 10.9 2 2.73BHEL 4 171522 7.79 0.40 68609 4.89 7 -2.90Airtel 5 154658 7.02 0.80 123727 8.82 4 1.80SBI 6 130043 5.90 0.50 65021 4.63 8 -1.27HUL 7 100291 4.55 0.55 55160 3.93 9 -0.62

ITC 899070 4.50 0.70 69349 4.94 6

0.44Infosys 9 83292 3.78 0.85 70799 5.05 5 1.27TCS 10 67356 3.06 0.70 47149 3.36 10 0.30Wipro 11 63218 2.87 0.50 31609 2.25 16 -0.62Sunpharma 12

60318 2.74 0.35 21111 1.50 18

-1.24HDFC 13 45954 2.09 0.75 34466 2.46 14 0.37


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Rcomm 14 40997 1.86 0.80 32797 2.34 15 0.48L &T 15 39725 1.80 0.90 35752 2.55 13 0.75HDFCBank 16

37117 1.70 1.00 37117 2.64 11

0.94ICICIBan

k 17

36153 1.64 1.00 36153 2.58 12

0.94DLF 18 33001 1.50 0.80 26401 1.88 17 0.38Sterlite 19 27577 1.25 0.65 17925 1.28 20 0.03Maruthisuz 20

25137 1.14 0.80 20110 1.43 19

0.29TATAPower 21

24894 1.13 0.65 16181 1.15 21

0.02Grasim 22 16717 0.76 0.80 13374 0.95 22 0.19Rel infra 23 15065 0.68 0.80 12052 0.86 23 0.18TATASte

el 24

14904 0.68 0.80 11923 0.85 24

0.17J.P.Asso 25 14528 0.66 0.55 7991 0.57 27 -0.09TATAMotor 26

14022 0.64 0.55 7712 0.55 28

-0.09ACC 27 11671 0.53 0.90 10504 0.75 25 0.22Hindalco 28 10464 0.48 0.65 6802 0.48 30 0.00M&M 29 10367 0.47 0.80 8294 0.59 26 0.12Ranbaxy 30 10206 0.46 0.70 7144 0.51 29 0.05

2178092

14031

87


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As with the Sensex companies, there have also been somenotable changes in the way different industries have beenrepresented in the modified index. Taking a major hit is thepharmaceutical sector, which loses about 1.24% in the total

weight and 18th position from the 12th spot. This is because of thelow float of 35% of the pharmaceutical companies. The othersector that lost owing to its low free float in the recast is theEngineering and Capital Goods Sector (BHEL). The weight of thesector decreased from 7.79% to 4.49%. the complete marketcapital of the new age banks ICICI Bank and HDFC Bank beingfreely available has spurred the weight of banking and financialservices sector from 11.33% to 12.31%. Another gainer is the oil

and Gas sector that gained 2.73% points.

Comparison of volatility of Nifty and Sensex

Common Stocksin Nifty and Sensex

Volatility

Nifty SensexExcess ofSensex

over Nifty

ACC 0.60 0.75 0.15

BHARTI AIRTEL 7.06 8.82 1.76BHEL 3.92 4.89 0.97DLF 1.53 1.88 0.35GRASIM 0.74 0.95 0.21HDFC 2.07 2.46 0.39HDFC BANK 2.13 2.65 0.52HINDALCO 0.40 0.48 0.08


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HUL 3.18 3.93 0.75ICICI BANK 2.20 2.58 0.38INFOSYS 4.04 5.05 1.01ITC LTD 3.98 4.94 0.96LARSEN AND TURBO 2.07 2.55 0.48

MAH & MAH 0.47 0.59 0.12MARUTHI SUZUKI 1.11 1.43 0.32NTPC 8.62 10.82 2.20ONGC 8.69 10.9 2.21RANBAXY LABS 0.50 0.51 0.01RELIANCE IND LTD 11.59 14.47 2.88RELIANCE COMM 1.85 2.34 0.49SBI 3.82 4.63 0.81STERLITE IND 1.01 1.28 0.27SUN PHARMA 1.23 1.5 0.27

TATA MOTORS 0.41 0.55 0.14TATA POWER 0.95 1.15 0.20TATA STEEL 0.68 0.85 0.17TCS 2.73 3.36 0.63WIPRO 1.84 2.25 0.41

79.42 98.56


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Out of these 28 stocks which are common to both the indicesalmost all are more volatile in Sensex.

From the above table it is clear that the nifty has low volatility in

comparison to the Sensex. This low volatility is mainly due toimproved diversification and better liquidity position in the nifty.As a measure of volatility, here the standard deviation is used. Itis also used to measure the risk of a security. The smallerstandard deviation shows the tighter probability distribution andthe lower risk associated with the security and vice- versa. Thedifference in volatility is more pronounced intra day owing to theinferior liquidity of the BSE. The volatility of the Nifty is 2.81% ascompared to 3.53% for the Sensex.

Industry Representation in Nifty and Sensex

Industry Nifty (%)Sensex

(%)Cement 1.19 0.75

Telecommunication 10.45 3.16Pharmaceutical 2.57 2.01

Information Technology 9.00 10.66Automotives 3.02 2.57Banking & Finance 11.38 12.32Construction & RealEstate 3.86 2.45Oil & Gas 14.13 10.90


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Metals & Mining 4.69 2.61Power Gen & Dist 12.49 12.83Utilities 3.92 21.90Food & Beverages 3.98 4.94

Engineering & Capgoods 5.18 4.89

The index should be fairly representative of the entiremarket. All or at least most sectors should be represented in theindex in the same weight as they are in the market capital of theentire market. Here, there is a need to distinguish the sectorreplication the replication should be of the listed companies and

not the sect oral division in the whole economy. For example,about 25% of the GDP of the Indian economy comes from theagricultural sector, but the representation of the sector on thebourses (i.e. market capital of listed agrarian companies as apercentage of the market capital of the equity market) isminiscule.


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An analysis of the Nifty and the Sensex showsinteresting results. 14 industries are represented in the Nifty whilethe Sensex represent only 13. In addition the largest sector in theSensex, Utilities represents 21.90% of the index, while Oil and

Gas, the largest sector represented in the Nifty covers only14.13%. The oil and gas industry, an important heavy industry isbetter represented in Nifty (14.13%) than in the Sensex (10.90%).

Thus we can conclude that Nifty is a betterrepresentative of the entire market. With Nifty having 50 stocksand Sensex 30, one might have thought that major stocks wouldinfluence the Sensex much more than the Nifty. However, the factis quite contrary to this supposition.

The top 10% of the Sensex stocks constitutes only36.19% of its total free float market capitalization, while theweight of the top 10% of Nifty stocks is 39.98%. likewise in eachof the comparisons, the capitalization of the top n% of the Sensexstocks as a percentage of total capitalization is less than that ofthe Nifty. Conversely the share of the bottom n% of the Sensex issubstantially higher than that of the Nifty for all values of n.

This analysis shows that a sharp change in the top indexconstituents will have lesser effect on the Sensex than on Nifty.

Therefore the Sensex is less sensitive to individual stock gyrationsthan the Nifty. This is undoubtly because Sensex change overfrom the Full Market Capital to Free Float Market Method

Liquidity in Sensex and Nifty

Liquidity serves as a fuel for the price discovery process. It is the

main criteria sought by the investors while investing in the stockmarket. The market price of a stock is said to consist of twocomponents namely the intrinsic value of the share and theliquidity premium. Therefore liquidity plays an important role indeciding the market price after considering its intrinsic value.


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The price of any index is made of price of shares included in theindex. these shares trade in the market at different prices. Theinvestors prefers the market that provides better liquiditybecause price tends to be better if more number of investors have

participated in the price discovery process. Hence the index whichhas more of liquidity is certainly reflected in the prices of thestock and the market in a better way in comparison to the markethaving less liquidity. If we compare the liquidity of two indices,Nifty and Sensex, it is found that the liquidity of Nifty is far betterthan that of Sensex.


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Conclusions

&

Suggestions

The stock market provides a place for the purchase and saleof securities.


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A stock index is created to provide investors with informationregarding the average share price in stock market. Theseindices are expected to capture the overall behavior ofequity market and need to represent the return obtained by

typical portfolios in the country.

Nifty is calculated based on full market capitalizationmethodology whereas Free Float market capitalization is themethod used for calculating the Sensex.

Free float indices are said to be better reflectors of marketmovements as they exclude the illiquid and untradedpromoters holdings in their constituent companies. Thus theindex reflects changes in the market that arise from activelytraded share capital.

Both Nifty and Sensex are reviewed every quarter. The BSEindex committee meets every quarter to review all the BSEindices including the Sensex. Similarly, the IndexMaintenance Sub Committee of the NSE meets every threemonths to review the constituents of the Nifty.

If we compare the liquidity of two indices, Nifty and Sensex,it is found that the liquidity of Nifty is far better than that ofSensex.

Investors should be educated and made aware of theconcept of indices for the right selection of index according

to their specifications.

The concept should be made more transparent and simple tounderstand.

The concept and study of stock markets must be included inthe academic curriculum for the students at graduation level


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in order to transform them into real time investors andspeculators in future.

Some training institutes and organizations such as ITIs

should be started under the responsibility of stockexchanges to train the investors for the short period, toeffect long term investors welfare and phenomenal changesin investment scenario in future.

Conceptual School Work on Stock Indices

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