Indian Stock Exchange NSE and how their

indices are calculated

by:

Subhankar Nandan (NMBA-47)

Loyola Academy (PG)Investment Management

What is a Stock Exchange?

Stock exchange is that place where trading of shares is done in terms of sale and purchase.

INDIAN STOCK EXCHANGES AND THEIR INDICES

Indices: SENSEX & NIFTY

Stock Market performance is quantified by calculating an index

using the benchmark scrip’s and as known to all SENSEX (Sensitive Index) is associated with Bombay

Stock Exchange and S&P CNX NIFTY is associated with National Stock

Exchange

Stock Exchange Of India Limited - NSE Definition of 'National Stock Exchange Of

India Limited - NSE'• The National Stock Exchange is India's

largest financial market. Established in 1992, the NSE has developed into a sophisticated, electronic market, which ranks third in the world for transacted volume. The NSE conducts transactions in the wholesale debt, equity and derivative markets.

 Investopedia explains 'National Stock

Exchange Of India Limited - NSE'• Based in Mumbai, India, the National

Stock Exchange is a leader in market technology. The exchange's supports more than 3,000 VSAT terminals, making the NSE the largest private wide-area network in the country. The National Stock Exchange has been a pioneer for Indian financial markets, being the first electronic limit order book to trade derivatives and ETFs

NSE: National Stock Exchange

The National Stock Exchange (NSE), located in Bombay, is India's first debt market. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid-1994. It was recently accorded recognition as a stock exchange by the Department of Company Affairs. The instruments traded are, treasury bills, government security and bonds issued by public sector companies

NSE: National Stock Exchange

Type Stock Exchange

Location Mumbai, India

Coordinates 19°3′37″N 72°51′35″E

Founded 1992

Owner National Stock Exchange of India Limited

Key people Ravi Narain (MD)

Currency Indian rupee ( )

No. of listings 1,646

MarketCap US$1 trillion (Jul 2012)[1]

Indexes S&P CNX NiftyCNX Nifty JuniorS&P CNX 500

Website www.nseindia.com

NSE - Corporate OfficeNational Stock Exchange of India Ltd.

Exchange Plaza,Plot no. C/1, G Block,Bandra-Kurla Complex

Bandra (E) Mumbai - 400 051.Tel No: (022) 26598100 - 8114

Fax No: (022) 26598120

NSE - Branch OfficesMumbai6th Floor, Kohinoor City, Tower -1, Commercial - II, Kirol Road, Off. L.B.S. Marg,Kurla (W),Mumbai - 400 070Tel. No : (022) 25045300Fax No:  (022) 25045298

AhmedabadOffice No. 304/305GCP Business Centre Opposite Memnagar Fire StationMemnagar Ahmedabad - 380052Tel No : (079) 26420481/ 26420482Fax No : (079) 26420485

ChennaiNational Stock Exchange of India Ltd8th Floor, Arihant Nitco Park,No 90, Dr Radhakrishnan Salai,Mylapore, Chennai 600 004.Tel No : (044)-28479900 / 28479902-05Fax No : (044) 28479926/27

Delhi4th Floor,Jeevan Vihar BuildingParliament StreetNew Delhi-110001Tel No: (011)  23741741, 49393000Fax No: (011) 23459291, 49393091

HyderabadH No.3-6-322Mahavir House, IInd FloorChamber no.203 & 204BasheerbaghHyderabad - 500029Tel No: (040) 23227084, 23227085Fax No: (040) 23227086

Kolkata1st Floor, Park View Apartments99, Rash Behari Avenue,Kolkata – 700 029.Tel No : (033) 4040 0400, 24631802Fax No : (033) 4040 0440, 24631791 

Origins• The National Stock Exchange of India was set up by 

Government of India on the recommendation of Pherwani Committee in 1991.Promoted by leading Financial institutions essentially led by IDBI at the behest of the Government of India, it was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000

Objectives

• Establishing nationwide trading facilities for all types of securities.

• Ensuring equal access to investors all-over the country through an appropriate communication network.

• Meeting international benchmarks and standards.

• Enabling shorter settlement cycles and book entry settlements.

Products

NSE has launched several stock indices, including

• S&P CNX Nifty (Standard & Poor's CRISIL NSE Index)

• CNX Nifty Junior• CNX 100 (= S&P CNX Nifty + CNX

Nifty Junior)• S&P CNX 500 (= CNX 100 + 400

major players across 72 industries)• CNX Midcap (introduced on 18 July

2005 replacing CNX Midcap 200)

S&P CNX Nifty• The S&P CNX Nifty, also called the Nifty 50 or simply

the Nifty, is a stock market index and benchmark index for indian equity market. Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL (Credit Rating and Information Services of India Ltd). IISL is India's first specialized company focused upon the index as a core product. IISL has a marketing and licensing agreement with Standard & Poor's for co-branding equity indices. 'CNX' in its name stands for 'CRISIL NSE Index'.

• S&P CNX Nifty has shaped up as the largest single financial product in India, with an ecosystem comprising: exchange traded funds (onshore and offshore), exchange-traded futures and options (at NSE in India and at SGX and CME abroad), other index funds and OTC derivatives (mostly offshore).

• Graph of S&P CNX Nifty from January 1997 to March 2011

• The S&P CNX Nifty covers 22 sectors of the Indian economyand offers investment managers exposure to the Indian market in one portfolio. The S&P CNX Nifty stocks represents about 67.27% of the free float market capitalization of the stocks listed at National Stock Exchange (NSE) as on September 30, 2012.

• The S&P CNX Nifty index is a free float market capitalisation weighted index. The index was initially calculated on full market capitalisation methodology. From June 26, 2009, the computation was changed to free float methodology. The base period for the S&P CNX Nifty index is November 3, 1995, which marked the completion of one year of operations of NSE's Capital Market Segment. The base value of the index has been set at 1000, and a base capital of Rs 2.06 trillion.[1] The S&P CNX Nifty Index was developed by Ajay Shah and Susan Thomas.

Currency of Calculation • For the S&P CNX Nifty, all prices

are in Indian rupees.

Base Date • The base period for the S&P CNX

Nifty index is November 3, 1995, which marked the completion of one year of operations of NSE's Capital Market Segment. The base value of the index has been set at 1000, and a base capital of Rs 2.06 trillion.

Partnership

• The S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between the NSE and CRISIL. IISL is India’s first specialized company focused on an index as a core product. IISL has a licensing and marketing agreement with Standard & Poor’s, who is a world leader in index services.

Highlights

• The S&P CNX Nifty is a 50 stock, float-adjusted market-capitalization weighted index for India, accounting for 21 diversified sectors of the economy. It is used for a variety of purposes, such as benchmarking fund portfolios, index based derivatives and index funds.

• The S&P CNX Nifty is derived from economic research and is created for those interested in investing and trading in Indian equities.

Market Representation. & Diversification.

Market Representation. • The S&P CNX Nifty stocks represent about

65% of the total float-adjusted market capitalization of the National Stock Exchange (NSE).

Diversification. • The S&P CNX Nifty is a diversified index,

accurately reflecting the overall market. The reward-to-risk ratio of S&P CNX Nifty is higher than other leading indices, offering similar returns but at lesser risk.

Liquidity.

• Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for inclusion in the S&P CNX Nifty, it has to reliably have market impact cost below 0.50 %, when doing S&P CNX Nifty trades of Rupees (Rs) 20 million. The current impact cost of the S&P CNX Nifty for a portfolio size of Rs 20 million is 0.13%.

Hedging Effectiveness.• The basic risk of the S&P CNX Nifty

futures is lower than other index portfolios, due to the liquidity of the S&P CNX Nifty constituent stocks and of the NSE. In addition, the S&P CNX Nifty has higher correlations with typical investment portfolios in India, compared to other indices. These two factors allow for effective hedging of the Index.

Index Family

S&P CNX Defty. • The S&P CNX Defty is a U.S. dollar-

denominated index based on the S&P CNX Nifty. This index was developed to provide a benchmark of Indian stocks to international investors, providing them with an instrument for measuring returns on their equity investment in dollar terms. This ensures that the risk arising out of currency fluctuation is covered through the S&P CNX Defty.

 S&P CNX Nifty companies of India

As of 28 Sep 2012:• ACC

•  Ambuja Cements

•  Asian Paints

•  Axis Bank

•  Bajaj Auto

•  Bank of Baroda

•  BHEL

•  BPCL

•  Bharti Airtel

•  Cairn India

•  Cipla

•  Coal India

•  DLF

• Dr. Reddy's Laboratories

•  GAIL

•  Grasim Industries

•  HCL Technologies

•  HDFC

•  HDFC Bank•  Hero MotoCorp•  Hindalco Industries•  HUL•  Infosys•  ICICI Bank• IDFC•  ITC Limited•  Jaiprakash Associates•  Jindal Steel and Power•  Kotak Mahindra Bank•  L&T•  Lupin•  Mahindra & Mahindra•  Maruti Udyog•  NTPC•  ONGC

• Power Grid Corporation•  PNB•  Ranbaxy Laboratories•  Reliance Infrastructure•  Reliance Industries•  Sesa Goa•  Siemens•  SBI•  Sun Pharmaceutical•  TCS• Tata Motors•  Tata Power•  Tata Steel•  Ultratech Cement•  Wipro

HOW ARE INDICES OF SENSEX AND NIFTY CALCULATED???

How are the SENSEX 30 & NIFTY 50 Stocks are

selected?• Listing History• Trading Frequency• Rank based on the Market Cap

(Should be Among top 100)• Market Capitalization weight• Industry / sector they belong• Historical Record

Free Float Market Capitalization??

The value of all the shares available for public trading excluding the promoter equity, holdings through FDI Route, Holdings by private corporate, and holdings by Employee Welfare Funds.

Why Free Flow Market Cap?

1. It depicts the market more rationally2. It removes undue influence of

government or promoter share holding, there by giving the equal opportunity for companies to be in the NIFTY

3. Almost all the Indices world over are calculated by this methodology

4. It gives Fund managers more authentic information for benchmark comparisons.

SENSEX & NIFTY CALCULATION

METHODOLOGY

• SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at any point of time reflects the free-float market

• It reflects value of 30 component stocks relative to a base period.

• The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company.

• This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

• The base period of SENSEX is 1978-79 and the base value is 100 index points. ( notation 1978-79=100).

• The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.

• The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrip’s etc.

• During market hours, prices of the index scrip's, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds. The value of SENSEX is disseminated in real time.

How SENSEX is calculated?

The formula for calculating the SENSEX = (Sum of free flow market cap of 30 benchmark stocks)*Index Factor

where,

Index Factor = 100/Market Cap Value in 1978-79. 100 is the Index value during 1978-79.

Example:

Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total shares in SBI are 500 out of which 200 are held by Government and only 300 are available for public trading. RELIANCE has 1000 shares out of which 500 are held by promoters and 500 are available for trading. Assume price of SBI Stock is Rs.100 and Reliance is Rs.200. Then "free-Floating Market Cap" of these 2 companies =

(300*100+500*200) = 30000+100000 = Rs. 130000

Assume Market Cap during the year 1978-79 was Rs.25000

Then SENSEX = 130000*100/25000 = 520.

The methodology in the example is exactly followed to calculate the SENSEX, only difference being the inclusion of 30 stocks.

Calculations of the S&P CNX Defty

• The U.S. dollar/Rupee exchange rate is based on a real-time polled indicative data feed, which contains bid/ask rates at a point in time. The polled data is sourced from Thomson Reuters. The data is polled from market participants, including leading nationalized banks, private Indian banks and foreign exchange brokers. The frequency of polled data is more than 3-4 updates per minute, depending on market volatility, totaling more than 1000 updates in a day. The closing value of S&P CNX Defty is computed based on a simple average of the U.S. dollar/Rupee exchange rates received during the last half an hour of trading on the National Stock Exchange of India Ltd. (NSE) and applied to the closing value of the S&P CNX Nifty.

Index Closure Algorithm• The closing SENSEX & NIFTY on any trading day is computed

taking the weighted average of all the trades on SENSEX & NIFTY constituents in the last 30 minutes of trading session.

• If a SENSEX & NIFTY constituent has not traded in the last 30 minutes, the last traded price is taken for computation of the Index closure.

• If a SENSEX & NIFTY constituent has not traded at all in a day, then its last day's closing price is taken for computation of Index closure.

• The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.

•

NIFTY

The National Stock Exchange (NSE) is associated with NIFTY and it is also calculated by the same methodology but with two key differences.

1. Base year is 1995 and base value is 1000.

2. NIFTY is calculated based on 50 stocks.

Everything else remains the same in NIFTY Index calculation as well.

Benefits of Stock Exchanges to Community

1. It assist the economies development by providing a body of interested investors.

2. It uploads the position of superior enterprises and assist them in raising further funds.

3. It encourages capital formation4. Government can undertake projects of

national importance and social value raising funds through the sale of its securities on the stock exchange.

5. It is the stock exchanges that central bank of a country can control credit by undertaking open market operations (purchase and sale of securities)

Benefits to Investor

1. Liquidity of the investment is increased2. The securities dealt on a stock exchange

are good collateral security for loans.3. The stock exchange safeguards

interests of investors through strict enforcement of rules and regulations.

4. The present net worth of investments can be easily known by the daily quotations.

5. The risk is considerably less when investor holds or purchases listed securities.

Benefits to the company

1. A company whose shares quoted on stock exchange they enjoy better reputation and credit.

2. The market for the shares of such a company is naturally widened.

3. The market price of securities is likely to be higher in relation to its earnings, dividends and property values. This raises the bargaining power of the company in the event of a takeover, merger or amalgamation.

ADJUSTMENTS FOR BONUS, RIGHTS AND NEWLY ISSUED CAPITAL

Adjustment for Bonus, Rights and Newly Issued

Capital

• NIFTY calculation needs to be adjusted for issue of Bonus or Rights shares, If no adjustments are made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance

• At the NSE Index Cell , the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the NIFTY value.

Adjustments for Rights Issues

• When a company, included in the compilation of the index, issues right shares, the free-float market capitalization of that company is increased by the number of additional shares issued based on the theoretical price.

• An offsetting or proportionate adjustment is then made to the Base Market capitalization (see 'Base Market capitalization Adjustment' below).

Adjustments for Bonus Issue• When a company, included in the compilation of the

index, issues bonus shares, the market capitalization of that company does not undergo any change. Therefore, there is no 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 new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.

Base Market capitalization Adjustment

• The formula for adjusting the Base Market capitalization is as follows:

• To illustrate, suppose a company issues right shares which increases the market capitalization of the shares of that company by say, Rs.100 crores. The existing Base Market capitalization (Old Base Market capitalization), say, is Rs.2450 crores and the aggregate market capitalization of all the shares included in the index before the right issue is made is, say Rs.4781 crore

New Base Mkt. cap.=Old Base Mkt. cap. xNew Market capitalization-------------------------------

Old Market capitalization

• 2450 x (4781+100) --------------------------

=Rs.2501.24crores         4781

• This figure of Rs. 2501.24 crore will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change becomes necessary.

Bibliography:

NSE web site

NSE brochure

Wikipedia

Yahoo answer

THANK YOU