How Is A Stock Excluded or Included In The Nifty Index

by Vinaya HS on September 25, 2017

in Finance

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Nifty index was introduced in the year 1996 and 50 stocks were made part of it. Since then it has experienced a high rate of churning and till March’ 2017 only 16 constituents are now the part of the original list. Rest all of them were replaced. On March 31st, Idea Cellular and Bharat heavy electricals were replaced with IOC (Indian Oil Cooperation) and Indiabulls Housing Finance.

Nifty index was created to benchmark the fund portfolios, index derivatives and index funds. The constituent company needs to fulfill a certain criterion to get included as stocks in the nifty index. To get included in the Nifty index, the stock should have traded at an average impact cost of 0.5% or lesser in the last six months for 90% of the observations. Another criterion is that it should also have at least twice the float adjusted market capitalization of the current smallest index constituent. Also, in order to get the eligibility for inclusion, the constituent company must be domiciled in India and traded on the exchange. The stock should be able to get traded in F&O or the futures and options segment on the NSE too. Other few factors that are taken into consideration are market capitalization, liquidity and trading frequency.

Talking about the exclusion, two times every year a new list of eligible stocks is reviewed and compared with the original stocks constituting the Nifty index. After the review, if it is found a spin off, merger or acquisition or if there are some small constituents which can be excluded and there are some new stocks that can replace them, then the changes are made. The changes are made by re balancing the index semi-annually and a time period of four weeks is given by the exchange to make the necessary changes.

India Index Services and Products is a group company of the National Stock Exchange (NSE) India, that owns and manages 67 indices under Nifty brand that also includes the Nifty index. IISL has constituted a committee called the Index Maintenance Subcommittee which is the deciding authority that makes all the decisions pertaining to the inclusions and exclusions in the index.

Another important thing business news confirms is that the index level does not change after the necessary changes are made. In fact, when a new stock is added after replacing a stock in the index, the index divisor is so adjusted that the change in the index market value as a result of this inclusion and exclusion does not change the index level. Also, in the last year February, IISL had made changes in the stock selection that included the Differential Voting Rights of securities.

As per the recent share market news, Nifty index will go back to the 50 stocks from the current 51 stocks from September 29 this year. ACC Ltd., Bank of Baroda Ltd., Tata Power Co. Ltd. and Tata Motors DVR will be excluded and Bajaj Finance Ltd., Hindustan Petroleum Corporation Ltd. and UPL Ltd. will be added.

For more on Business & Stock Market News, visit BloombergQuint.




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