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Monday, April 24, 2017

Stock Exclusion and Inclusion in the Nifty Index


How Stocks Excluded and Included in the Nifty Index


From March 31, Indian Oil Corp and Indiabulls Housing Finance will replace Idea Cellular and Bharat Heavy Electricals in the benchmark Nifty index. Launched in 1996, the index has seen high churning -only 16 of the original 50 constituents are now part of it. The index is used for many purposes, such as benchmarking fund portfolios, index funds and index-based derivatives. Here are the criteria for inclusion and exclusion in the index:

What is the criteria for inclusion in the benchmark index?

The stock should have traded at an average impact cost of 0.5% or less in the last six months for 90% of the observations and should also have at least twice the float adjusted market capitalisation of the current smallest index constituent. The company must be domiciled in India and traded on the ex change. The stock must be available for trading in the futures and options segment on the NSE to be eligible for inclusion. Market capitalisation, liquidity and trading frequency are other criteria that are considered to include a stock into an index.

What leads to exclusion from the index?

A list of new eligible stocks is drawn up to review against the current index constituents twice a year and in case any changes are to be made, then the smallest constituents are excluded and new stocks replace them. Exclusion may also happen in case of a spin-off, merger or acquisition.

When do the changes take place?

The index is re-balanced on semi-annual basis and the ex change gives four weeks before making any changes to the index.

Who decides which company will be part of Nifty?

The India Index Services and Products, group company of the National Stock Exchange of India, owns and manages 67 indices under Nifty brand, including the Nifty index. IISL has constituted the Index Maintenance Subcommittee which makes all decisions on inclusions and exclusions in the index.

Does the index level change after the changes are made?

No. When a stock is replaced by another stock in the index, the index divisor is adjusted so the change in index market value that results from the inclusion and exclusion does not change the index level.

Can Differential Voting Rights become part of Nifty?

In February 2016, IISL modified its stock selection criteria to include Differential Voting Rights (DVRs) of securities in the index. Tata Motors DVR became the first DVR to be included in the Nifty , as a result of which it has 51 securities, but the number of companies remains at 50.







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