Conceptual Schoolwork on Stock Indices

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

MESCO INSTITUTE OF MANAGEMENT & COMPUTER SCIENCE

(Affiliated to OSMANIA UNIVERSITY)
(Approved by ALL INDIA COUNCIL FOR TECHNICAL EDUCATION)

HYDERABAD 2007-2009

ACKNOWLEDGEMENT
I take this opportunity to thank each and every one who has been very helpful in accomplishing the present project. I express my deep gratitude to Senior Consultants M.A MANNAN & M.A MOHSIN who also happens to be my guide for the present work, nevertheless the whole of the project work done, is a standing example of his possessed skill. I thank him for his endeavor. I take this opportunity to thank Mr.IRFAN AHMED, H.O.D for his support and help he had extended for successful execution of the project. I render my sincere thanks to Ms.NARJIS FATIMA and Mrs.KULSUM HASSAN faculty of M.B.A. and the other faculty members of MESCO INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, OSMANIA UNIVERSITY for their efforts in enlightening 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 my friends for their Co-operation.

Place: Hyderabad. Date:

(MOHD

MIZBAH UDDIN)

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 of MASTER OF BUSINESS ADMINISTRATION 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.

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 are regarding 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 on Stock 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 information both 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

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&P CNX 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 more dynamic 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.

INTRODUCTION

OBJECTIVES OF STUDY: The stock exchange is the most perfect type of market for securities whether govt, semi- govt or non govt. organizations as well as for shares and debentures issued by joint stock companies. Stock exchanges provide liquidity to the listed companies. They also provide ready marketability and unequalled facility for transfer of ownership of stock, shares and securities. The various indicators of the stock market need a better understanding for healthy survival of the investors in the stock market. 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 under the 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 under consideration. To witness the uniqueness and requisites of each index taken for study. To provide sheer knowledge base and guidance to investors and students in the near future.

SCOPE OF THE STUDY

 The scope of the study is to assess the market and to select some particular scripts. To know the various indices of the stock market. To determine which of the many tools is most efficient and effective. 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 is very essential. There are basically two types of data that are used in the preparation of a report, they are primary and secondary data.

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 this subject, business magazines and through internet.

LIMITATIONS OF THE STUDY:

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

Due to time constraints the study was carried out within 6 to 8 weeks.

The source of data collection is limited and confined to secondary data only.

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

LITERATURE REVIEW

INTRODUCTION The price movements in the market as a whole are measured by market indicator series. The indicator series constitute a composite report of the market performance. One popular type of indicator series is an Index. Stock indices have been used by benchmarks to monitor the share market and to judge performance. Two 19th century mathematicians namely Etenne Lespeyres and Hermann Passche first proposed modern indices. Dow Jones industrial average was first equity index published and since then the different variety of indices have come, there are two main type of indices namely Price Index, Quantity Index and value index. The price index is most significant as it measures changes in the level of price of products in the financial, commodities or any other type of market from one period to another. The indices in financial market measures changes in the price of securities like equities, debentures, govt securities etc. the most popular index in the financial market is the stock index or equity index which use a set of stocks that are representative of the entire market or a specified sector. They measure the change in the oral behavior of the market or sector over a period of time. A large number of indices are maintained by the stock exchanges to represent the entire market. The main objective of the study is to know the relationship that exists in the various indices. The main returns and variances are analyzed to find out if there are any significant differences among various indices and also to select the best index. The main problems faced by the investors are regarding interpretation of index values as well as how far the index is reliable while investing in stock that doesnt contribute to index. To replicate the return on entire market is more expensive and is almost impossible. So for the index study

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

ECONOMIC SIGNIFICANCE OF AN INDEX The ups and downs of the index reflect the changing expectations of the stock market about future dividends in the Indias corporate sector. When index goes up it implies that the expectations of the stock about the prospective dividends in the future will be higher than previous dividends. When the prospect of dividends in the future becomes pessimistic the index drops. An ideal index gives up instant reading about how the stock market perceives the future of the Indian capital market. PHILOSOPHY BEHIND INDEX CONSTRUCTION Price movements in equity are on account of the news related to the company or news related to the country or economy. The idea of an index is to capture and reflect the effect of this news on the market. Diversification is the key for achieving average wherein the individual stock fluctuations are cancelled out in the movement of index. hence, more the number of scribes the greater is the combination to reduce risk and to obtain better diversification. The most important factor to be considered here is the equality of scripts rather that number of scripts.

DEFINITION OF AN INDEX: An index is a number that represent the change in the set of values between a basic time period and another time period.

A statistical measure of change in an economy or a securities market. In the case of financial market, an index is essentially an imaginary portfolio of securities representing a particular market or 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 actual numeric value. Indexes measure the ups and downs of stock, bond and some commodities markets, in terms of market prices and weighting of companies in the index.

DESIRABLE FEATURES OF AN INDEX An index should consists of such stocks so that it can easily capture and reflect any effect like certain development in the company or something related to Indian industry or economy. For this the stock should be traded regularly on the bourse, such that the stock price would react immediately to any change that has taken place. In the same way a company whose stock is not traded regularly causes an implacable and disproportionate change in the index thus reducing the accuracy of the index, since index is the good indicator of the market status. Companies which are not traded regularly on the exchange are generally referred to as liquid stocks E.g.: stock like Wipro and motor industry companies are thinly traded and only partly reflect the current market sentiments. Thus the first important attribute of a good index is liquidity i.e. narrower the bid ask price the more liquid the stock. Liquidity is also, being able to buy and sell share at a price close to current market prices. REQUISITES OF AN INDEX Familiarity: The index chosen should preferably be widely known and accepted. The index must be capable of being a computed rapidly. A long time series study of the index should be available

which would illustrate the risks return characteristics under a variety of historical conditions. Representation: The index chosen should include such shares, which represent a reasonable large number of the other similar shapes with high market capitalization. The index should try to capture the behavior of large and well-diversified portfolios in the country so as to provide price manipulations. Easy Arbitrage: Shares include should be highly liquid so as to facilitate easy arbitrage, otherwise no arbitrage band around the fair price of the future would become wide and hedges would be paying larger penalty for this use of hedging services. Hedging Effectiveness: A good index is one which gives high hedging effectiveness that is the index should correlate with one and all portfolios whatever it may be a good index should give a very high risk reduction when a portfolio owner short sells the index features. The index should adequately reflect market risk high hedging effectiveness should be from the viewpoint of the manager, investors, etc. Regular Updates: Any good index should be reviewed on a regular basis and brought into line with the current economic scenario 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 philosophy of the index and its objectives. The major selection criterions are 1. Industry representation 2. Market capitalization 3. High liquidity / lower impact cost.

Most indices attempt to strike a balance between all the three major selection factors. Industry Capitalization: the objective of any index is to be a proxy for the market. So it imperative that the broad industry sector are entirely replicated in the index too. Market capitalization: Index providers always strive to ensure a maximum coverage of the entire market capitalization. As a result within every industry the largest market capitalization stocks are selected. However the minimum selection criterion level varies from industry to industry. Liquidity by impact cost: it is an important point to note that the stocks that are a part of index should be highly liquid. The reasons are twofold. a) An illiquid stock has stale prices and this tend to give flowed value to the index. b) The entry and exit cost at a particular index is high if the stocks are illiquid. This stock is called as impact cost of index. so it should be seen that the impact cost should be as low as possible. An index that acts as the benchmark of the market has an important role to play. The index has to be responsive to the changes in the market place. It should allow for the inclusion of the new industries as well as the exclusion of dead industries. 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

Companies listed on the Bombay stock exchange, it is not possible to look at the prices of every stock to find out whether the market movement is upward or downward. The indices Give a broad 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 of Ordinary 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 of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behavior of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.

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 the investors portfolio. 3. Indices function as a status report on the general economy. Impacts of the various economic policies are reflected on the stock market. 4. The investor can use the indices to allocate funds rationally among stocks. To earn returns on par with the market returns, he can choose the stocks that reflect the market movement. 5. Index funds and futures are formulated with the help of the indices. Usually fund managers construct portfolios to emulate any one of the major stock market index. ICICI has floated ICICI index bonds. The return of the bond is linked with the index movement.

6. Technical analysts studying the historical performance of the indices predict the future movement of the stock market. The relationship between the individual stock and index predicts the individual share price movement. 7. They can be used as a standard against which to compare the performance 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 financial investments and risk management 10. Index can be used to trade derivatives and for launching index based 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 Nifty may move up only 40 points. The main factors that differentiate one index from the other are given below. 1. The number of the component stocks 2. The composition of the stocks 3. The weights 1. The Number of the Component Stocks The number of stocks in an index influences the capable of reflecting the market movement. The sensex has 30 scrips like the Dow Jones Industrial Average in the U.S. At the same time BSE-100 (National), BSE-200, the Dollex, (dollar equivalent of BSE-200), the RBI Index (338stocks) and Nifty (50 stocks) are also widely used. Private organizations like CRISIL has constructed its own index and named it as CRISIL - 500. From the above examples it is clear that the number of scrips differs from one index to another and hence their movements also vary. BSE National Index is considered to be more representative than Sensex because it has 100 stocks. Out of 100, 22 are quoted on the BSE and the rest are listed on the BSE and other exchanges.

2. The Composition of the Stocks The composition of the stocks in the index reflects the market movement as well as the macroeconomic changes. The Centre for Monitoring Indian Economy maintains an index. If often changes the composition of the index so as to reflect the market movements in a better manner. Some of the scrips traded volume may fall down and at the same time some other stock may attract the market interest should be dropped and others must be added. Only then, the index would become more representative. In 1993, sensex dropped one company and added another. In August 1996 sensex was thoroughly revamped. Half of the scrips were changed. The composition of the Nifty was changed in April 1996 and 1998. Crisils 500 was changed in November 1996. In October 1998 the Nifty Junior Index composition has been changed. Recognizing the importance of the information technology scrips, they are included 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 the price or value. The Dow Jones Industrial Average and Nikkei Stock Average of 225 scrips to Tokyo stock exchange are weighted with the price. A weighted index is computed by adding the current prices of the stocks in the stock exchange and dividing the sum by the total number of stocks. The stocks with high price influence 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 weighted index the total market value of the share (the number of outstanding shares multiplied by the current market price) is the weight. Most of the indices all over the world and in India except Economic Times Ordinary Share Index are weighted with the value. The scrip influences the index in proportion to its importance in the market. The price changes that occur in scrip

with heavy market capitalization dominate the changes that occur in the index. The price changes caused by bonus issue or right of particular scrip are reflected in the index. With the bonus issue or right issue the number of outstanding shares and their values used to change. In an unweighted index, all stocks carry equal weights. The price or market volume of the scrip does not affect the index. The movement of the price is based on the percentage change in the average price of the stocks in the particular index. Here it assumes that equal amount of money is invested in each of the stocks in the index. Value Line Average in the US is calculated without weights but geometric mean is used in the computation 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. The base year should be free from any unnatural fluctuations in the market. If the base year in close to the current year, the index would be more effective in reflecting the changes in the market movement. At the same time if it is too close, the investor cannot make historical comparison. The Sensex has the base year as 1978-79 and the next oldest one is the RBI index of ordinary shares with 1980-81 as base year. The following table gives the summary of major stock market indices.

BSE INDICES:
For the premier stock exchange that pioneered the securities transaction business in India, over a century of experience is a proud achievement. A lot has changed since 1875 when 318 persons by paying a then princely amount of Re. 1, became members of what today is called Bombay Stock Exchange Limited (BSE). Over the decades, the stock market in the country has passed through good and bad periods. The journey in the 20th century

has not been an easy one. Till the decade of eighties, there was no measure or scale that could precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came out with 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 during market hours and displayed through the BOLT system, BSE website and news wire agencies. All BSE Indices are reviewed periodically by the BSE Index Committee. This Committee which comprises eminent independent finance professionals frames the broad policy guidelines for the development and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day maintenance of all indices and conducts research on development of new indices.

SENSEX - The Barometer of Indian Capital Markets:

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index

construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology. The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the investors. SENSEX has captured all these happenings in the most judicious manner. One can identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the SENSEX has become one of the most prominent brands in the country.

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 full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required. 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 scrip suspension etc. Final Rank: The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month

2.

3.

average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.
4.

Market Capitalization Weightage: The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index. Industry/Sector Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE. Track Record: In the opinion of the BSE Index Committee, the company should have an acceptable track record.

5.

6.

BSE MID-CAP AND BSE SMALL-CAP INDEX

BSE introduced the new index series called 'BSE MID-Cap' index and 'BSE Small-Cap' index to track the performance of companies with relatively smaller market capitalization. BSE-500 Index - represents more than 93% of the listed universe. Companies with large market capitalization bias the movement of BSE-500 index. This necessitated construction of a separate indicator to capture the trend in companies with lower market capitalization. Over the years, BSE Mid-Cap and BSE Small-Cap indices have proven to be a great utility to the investing community.

Salient feature of these indices are :

Launched in April 2005

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 of less than 60% days in preceding three months are not considered for inclusion in these indices Constructed on 80%-15%-5% method whereby companies aggregating 98.5% of average market capitalization are categorized under large, mid and small cap segment respectively from the list of eligible universe of BSE. BSE Mid-Cap tracks the performance of scrips between 80 & 95% of aggregate market capitalization and BSE Small-Cap index tracks the performance of remaining 5% scrips (95100%). 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 quarterly basis SECTORAL INDICES

BSE also constructs various sectoral indices "Sector Series (90/FF)" as detailed below. All these indices are calculated and disseminated on BOLT, BSE's trading terminal on a real time basis. "90/FF" implies that the index covers 90% of the sectoral market capitalization and is based on the Free-Float methodology. BSE Sector Series (90/FF) Indices

BSE BSE BSE BSE

Auto Index BANKEX Capital Goods Index Consumer Durables Index

BSE BSE BSE BSE BSE BSE BSE

FMCG Index Healthcare Index IT Index Metal Index Oil & Gas Index Power Index 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% in preceding 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 is considered so that movements in and out of the index are minimized. 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 unless it falls above 92% coverage. However, the above buffer criterion is applied only after the minimum 90% market coverage is satisfied.

Index Review Frequency The BSE Index Committee meets every quarter to discuss index related issues. In case of a revision in the Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index. NSE INDICES: India Index Services & Products Ltd. (IISL) India Index Services & Products Ltd. (IISL) is a joint venture between the National Stock Exchange of India Ltd. (NSE) and CRISIL Ltd. (formerly the Credit Rating Information Services of India Limited). IISL has been formed with the objective of providing a variety of indices and index related services and products for the capital markets. IISL has a consulting and licensing agreement with Standard and Poor's (S&P), the world's leading provider of investible equity indices, for co-branding IISL's equity indices. IISL - Products & Services IISL offers a wide range of products and services which are key support tools for the equity markets. We provide reliable, accurate and valuable data on indices and index related services to cater to the needs of various segments of users. Our speciality is indices based on Indian equity markets, which may be used for benchmarking, 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

of equity indices. Licensing is mandatory for tracking the performance of an IISL Index. Licensing is also required for use of the name of IISL or S&P CNX or CNX or any IISL Index. Fees for licensing would vary according to the type of the product and the period. CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE . The S&P prefix belongs to the USbased Standard & Poor's Financial Information Services. CNX indices are useful for fund managers, corporates, brokers and all such enterprises connected with investments in the equity markets. These indices can be used for tracking the markets, understanding the performance of a company vis-a-vis the market, determining how an investors portfolio is performing as compared to the market, trading derivative products and most importantly for development of index based funds by mutual funds.

Customized Indices IISL undertakes development & maintenance of customized indices for clients for tracking the performance of the client portfolio of stocks vis--vis objectively defined benchmarks, or for benchmarking NAV performance to customized indices. The customized indices can be sub-sets of existing indices or a completely new index viz. Sector Indices, Individual Business Group Indices, Industry Indices etc. Charges for this service vary depending on the activity performed by IISL.

S&P CNX Industry Indices S&P CNX 500 Equity Index is desegregated into 72 Industry sectors which are separately maintained by IISL. The industry indices are derived out of the S&P CNX 500 and care is taken to see that the industry representation in the entire universe of securities is reflected in the S&P CNX 500. e.g., if in the entire universe of securities, Banking sector has a 5% weightage, then the Banking sector (as determined by the Banking stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500. The Banking sector index would be derived out of the Banking stocks in the S&P CNX 500. The changes to the weightage of various sectors in the S&P CNX 500 would dynamically reflect the changes in the entire universe of securities. S&P CNX Nifty S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialised company focused upon the index as a core product. IISL has a Marketing and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services.

The average total traded value for the last six months of all Nifty stocks is approximately 53.75% of the traded value of all stocks on the NSE Nifty stocks represent about 61.70% of the total market capitalization 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

S&P CNX 500 The S&P CNX 500 is Indias first broadbased benchmark of the Indian capital market. The S&P CNX 500 represents about 84.24% of total market capitalisation and about 78% of the total turnover on the NSE as on March 31,2008. The S&P CNX 500 companies are disaggregated into 72 industry indices viz. S&P CNX Industry Indices. Industry weightages in the index reflect the industry weightages in the market. For e.g. if the banking sector has a 5% weightage in the universe of stocks traded on NSE, banking stocks in the index would also have an approx. representation of 5% in the index. CNX Midcap The medium capitalised segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX Midcap Index is to capture the movement and be a benchmark of the midcap segment of the market. Method of Computation CNX Midcap is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, 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 base value of 1000

Criteria for Selection of Constituent Stocks The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria :

All the stocks, which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization), shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe. After step (a), the weightages of the remaining stocks in the universe is determined again. After step (b), the cumulative weightage is calculated. After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 percent (i.e. upto to 74.99 percent) of the revised universe shall be ignored. After, step (d), all the constituents of S&P CNX Nifty shall be ignored. From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100 companies in terms of highest market capitalization, shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below.

Trading Interest All constituents of the CNX Midcap Index must have a minimum listing record of 6 months. In addition, all candidates for the Index are also evaluated for trading interest, in terms of volumes and trading frequency. Financial Performance All companies in the CNX Midcap Index have a minimum track

record of three years of operations with a positive net worth. Others A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the 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 the foreign shareholding is over 50% and / or the management control 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 should be less than 500 2. Company's turnover rank in the universe should be less than 500 3. 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 of operations with a positive networth. 5. A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period.

CNX PSE Index As part of its agenda to reform the Public Sector Enterprises (PSE), the Government has selectively been disinvesting its holdings in public sector enterprises since 1991. With a view to provide regulators, investors and market intermediaries with an appropriate benchmark that captures the performance of this segment of the market, as well as to make available an appropriate basis for pricing forthcoming issues of PSEs, IISL has developed the CNX PSE Index, comprising of 20 PSE stocks. The CNX 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 should be less than 500 2. Company's turnover rank in the universe should be less than 500 3. 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 of operations with a positive networth. 5. A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. S&P CNX Defty Almost every institutional investor and off-shore fund enterprise with an equity exposure in India would like to have an instrument

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

Performance indicator to foreign institutional investors, offshore funds, etc. Provides an effective tool for hedging Indian equity exposure. 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.

COMPANY PROFILE

RELIGARE ENTERPRISE LIMITED

RELIGARE, a RANBAXY PROMOTER group company, is one of the Indias leading integrated financial services institutions. The company offers a large and diverse bouquet of services ranging from equities, commodities, insurance broking, to wealth advisory, portfolio management services, personal financial services, investment banking and institutional broking services. The services are broadly clubbed across three key business verticals-retail, wealth management and the institutional spectrum. Religare enterprises limited is the holding company for all its businesses, structured and being operated through various subsidiaries.

Religares retail network spreads across the length and breadth of the country with its presence through more than 900 locations across more than 300 cities and towns. Having spread itself fairly well across the country and with the promise of not resting on its laurels, it has also aggressively started eyeing global geographies.

Recently, Religare has also partnered with AEGON, one of the largest insurance and pension companies globally, to offer life insurance and mutual fund product in India. The venture shall combine the international expertise of AEGON with the distribution strength of Religare.

Vision and mission Vision To build Religare as a globally trusted brand in the financial services domain and present it as the Investment Gateway of India'. Mission Providing complete financial care driven by the core values of diligence 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

Providing Information,

Knowledge,

MoneymakingIdeas&Advice, PersonalAttention PoweredbyWorldClass Research

&Service.

Religare is a Latin word that translates as to bind together. The name Religare was chosen to reflect the integrated nature of the financial services the company offers. The name is intended to unite and bring together the phenomenon of money and wealth to co-exist and serve the interest of individuals and institutional, alike.

The name is paired with the symbol of a four-leaf clover, a rare mutation of the common three-leaf clover. Each leaf of the fourleaf clover has a special meaning in the sphere of Religare, representing HOPE, TRUST, CARE and GOOD FORTUNE. Traditionally, it is considered good fortune to fine a four-leaf clover since there are about estimated 10,000 three leaf clover for every one four-leaf clover found. Hope-Trust-Care-Good fortune, all elements perfectly combine in the emblematic and rare four-leaf clover to visually symbolize the values that bind together and form the core of the Religare vision.

Group structure

Religare enterprises limited

Religare Securities Limited

Religare Finvest Limited

Equity Broking Online Investment Portal Portfolio Management Services Depository Services

Lending and Distribution business Proposed Custodial business

Religare Commodities Limited

Religare Insurance Broking Limited

Commodity Broking

Religare Capital Markets Limited

Life Insurance General Insurance Reinsurance Religare Arts Initiative Limited Business of Art Gallery launched - arts-i

Investment Banking Proposed Institutional Broking

Religare Realty Limited

In house Real Estate Management Company

Religare Venture Capital Limited

**

Religare Hichens Harrison

Private Equity and Investment Manager

Religare Asset Management*

Joint Ventures

1.

AEGON Religare Life Insurance Company. Religare Macquarie Wealth Management Ltd. Vistaar Religare -The Film Fund.

2.

3.

Other ventures

1.

Fortis Healthcare Limited, established in 1996 was founded on the vision of creating an integrated healthcare delivery system. With 22 hospitals in India, including multi-specialty & super specialty centres, the management is aggressively working towards taking this number to a significant level in the next few years to provide quality healthcare facilities and services across the nation. Super Religare Laboratories Limited (formerly SRL Ranbaxy) within 11 years of inception has become the largest Pathological Laboratory network in South Asia. It started a revolution in diagnostic services in India by ushering in the most specialized technologies, backed by innovation and diligence. The current footprint extends well beyond India in the Middle East and parts of Europe. Religare Wellness Limited (formerly Fortis Healthworld) is one of the leading players in the wellness retail space with a footprint of over 100 stores across India. The group envisages setting up a pan India world class retail network of wellness stores that would provide comprehensive solutions under one roof. Religare Technova Limited is the holding company for global IT business of the promoter group, offering Enterprise IT Solutions, Knowledge Management Solutions and software products and services. Currently with over 1500 employees and presence in over 10 countries, Religare Technova is poised to be a leader in the global IT space. Religare Voyages Limited is the holding company for the promoter groups integrated aviation and travel businesses. The Air Charter business is one of the largest in the non-

2.

3.

4.

5.

scheduled space in the country with its own top-of-the-line fleet that comprises jets, helicopters and turbo props. The travel business is duly accredited for complete management of both in-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, Religare Limited) Mr. Anil Saxena (Group Chief Finance Officer, Religare Limited)

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)

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 cities and towns, Religare caters to a large number of retail clients by offering all products under one roof through the branch network and online mode. Equity Trading Trading in Equities with Religare truly empowers you for your investment needs. We ensure you have a superlative trading experience 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 of Religare Enterprises Limited was initiated to spearhead Exchange based Commodity Trading. As a member of NCDEX, MCX and NMCE, RCL, present in 529 locations provides options in both agri and non-agri commodities for Exchange based commodity trading backed by incisive dedicated research. Online Investment Portal

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

Personal Financial Services Today, more and more people look up to ways and means which can fulfill their financial aspirations such as Savings, Retirement planning, Tax planning & Wealth planning, etc. All this coupled with multiple and cut throat competitive offerings makes it very difficult for an individual to come to a decision and this leads to the search of a partner who can help an individual understand the complex investment instruments and make the best use of them to meet his/her short-term and long-term financial objectives. Consumer Finance Religare's Consumer Finance business is operated through its NBFC arm, Religare Finvest Limited With the growing opportunities of Consumer Finance in India, Religares Capital Market & Non-Capital Market Lending products offer "loans for all your needs". Insurance Solutions Religare with one of the largest retail networks in the country offers 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 the Life, General and Reinsurance domains. Wealth spectrum To provide customized wealth advisory services to high net worth individuals (HNIs), Religare offers an exceptional selection of

investment opportunities, in every asset class. Our market knowledge and formidable resources facilitate wealth acceleration, diversification and capital preservation.

Wealth Management Religare operates its wealth management business in partnership with Macquarie through the joint venture - Religare Macquarie Wealth Management Limited (a 50:50 joint venture). The JV is a combination of strengths - Macquaries strong global expertise with 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 portfolios are customized to suit the unique requirements of investors. Religare PMS currently extends six portfolio management schemes, viz Monique, Panther, Tortoise, Elephant, Caterpillar and Leo. 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 cater to the sophisticated investment needs of high-end customers. The Priority Client Group brings in a "multi asset class" based investment approach backed by a team of dedicated relationship managers and best-in-class dealing capabilities. It strives to encourage clients to think beyond equities. Arts Initiative

Today's complex market structures have spun art out of the cocoon of mere aestheticism into a more rooted role as a recognized financial asset, a derivative with immense powers of wealth generation, equal to those of any brick and mortar industry. Given this base, it is now for the greater public-driven organizations concerned with the well being of art, to ensure that all the diverse dimensions of art are nurtured and given the right exposure, so that art permeates more completely into the societal fabric and enriches a wider consciousness.

International Advisory Fund Management Services Investing in international markets opens avenues for relatively stable investments and diversification. We at Religare provide our clients an opportunity to invest in international equities to scale up investment horizons and to enable them to gain from profits of global majors. An asset allocation module is developed based on the risk-return criteria of the investor and on country attractiveness, sector and industry strength, company strengths and global trends. Institutional spectrum Institutions, Banks and the Corporate have their own unique investment needs. Religare recognizes this and strives to offer a superlative investment experience for institutions and FIIs globally and would like to be seen as their preferred investment gateway. Institutional Broking Services With the mission to institutionalize and implement a process driven approach, the Institutional Broking Services at Religare cater to the investment needs of leading corporate houses and institutions. Backed by incisive research, this division would like to be seen as a one stop investment gateway and knowledge

repository for its clients, servicing their unique and sophisticated needs. Investment Banking Our Investment Banking business offered through Religare Capital Markets Limited (RCML), a wholly owned subsidiary of the holding company, Religare Enterprises Limited, deals in merchant banking, transaction advisory and corporate finance servicing the Corporate, 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. The company 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 Company and has rechristened its Asset management business as Religare Asset Management Company (P) Limited. Lotus - A leading AMC in India with a total of 1, 79,762 unit holders and AUM of Rs.4556.26 crores. It has 50 SEBI approved schemes 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 wholly owned subsidiary of Religare Securities Limited (RSL), which in turn is a 100% subsidiary of Religare Enterprises Limited.

AEGON RELIGARE (life insurance) Religare in partnership with AEGON, one of the world's largest life insurance and pension groups, operates its Life Insurance business in India under a Joint venture, AEGON Religare Life Insurance Company Limited. This venture is dedicated to build a firm future, both for customers and employees and will continue to balance a local approach with the power of an expanding global operation. AEGON Religare Life Insurance launched its pan-India multichannel operations in July, 2008 with over 30 branches spread across India. The business philosophy is to help people plan their life better and also provide high quality advice to customers and offer a superlative overall service experience. True to its stance of being "Refreshingly Different", powered by innovation, and bringing industry "firsts", AEGON Religare Life Insurance offers policy servicing on the phone via Interactive Voice Response System (IVR) by issuing the customer a T-Pin for authentication. It is also the first company to include the customer's medical report in the policy kit.

ANALYSIS & INTERPRETATION

SENSEX 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 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 freefloat market capitalization. The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the 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 scrips etc. During market hours, prices of the index scrips, 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.

Understanding Free-float Methodology Concept

Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market. 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 rationally as it takes into consideration only those shares that are available for trading in the market. Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index. A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis- -vis an investible index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error. Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This

improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Freefloat Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.

Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted 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 Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying 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 course come 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 generally excluded from the definition of Free-float:

Shares held by founders/directors/ acquirers which has control 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

Locked-in shares and shares which would not be sold in the open 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 and submitted by all index companies on a quarterly basis. (Format available on www.bseindia.com). BSE determines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation. Free-float Bands: % FreeFree-Float % FreeFree-Float Float Factor Float Factor >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

Index Closure Algorithm The closing SENSEX on any trading day is computed taking the weighted average of all the trades on SENSEX constituents in the last 30 minutes of trading session. If a SENSEX constituent has not traded in the last 30 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX 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.

Adjustment for Bonus, Rights and Newly Issued Capital SENSEX calculation needs to be adjusted for issue of Bonus or Rights shares If no adjustments were 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 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 might affect the index on a regular basis and carries out daily maintenance 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 of that company is increased by the number of additional shares issued based on the theoretical (ex-right) 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: New Market capitalization New Base Market Old Base Market ----------------------------= x capitalization capitalization ---------Old Market capitalization 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. The "New Base Market capitalization will then be:

2450 (4781+100)

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

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 is as follows: Company Base date price (Rs.) A Ltd 10 B Ltd C Ltd D Ltd E Ltd 50 100 1000 1050 Current Price (Rs.) 20 75 120 800 1020 No. of Shares outstandi ng 10000 1000 250 100 500 Free float (%) Free float Factor 0.80 0.65 0.95 0.55 0.35

78 63 92 55 32

Full market capitalization method: Base date Market Capital. A Ltd = 10 x 10,000 = B Ltd = 50 x 1000 C Ltd = 100 x 250 D Ltd = 1000 x 100 = E Ltd = 1050 x 500 = Total Rs. 1, 00,000 = = Rs.50, 000 Rs.25, 000

Rs.1, 00,000 Rs.5, 25,000 = Rs.8, 00,000

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

Market capital at current date. A Ltd = 20 x 10000 = B Ltd = 75 x 1000 C Ltd = 120 x 250 D Ltd = 800 x 100 = Rs.200000 = = Rs.75000 Rs.30000

Rs 80000 Rs.510000 = Rs.895000

E Ltd = 1020 x 500 = Total

Thus the index value at the current date = Current market price = old base market x new market capitalization Capitalization old market capitalization = 895000 x 100 = 112 800000 Thus the rise in the index is 12%

The weight of this companies in the full market capitalization index work out to be A Ltd B Ltd C Ltd D Ltd E Ltd = 200000 895000 x 100 = = 22.34%

= 75000 x 100 895000

8.37% = 3.35%

= 30000 x 100 895000 = 80000 x 100 895000 =

8.93% = 56.98%

= 510000 895000 Free float Method : Base date free float capital A Ltd = B Ltd = C Ltd = D Ltd = E Ltd = Total 10 x 10000 x 0.80 50 x 1000 x 0.65 100 x 250 x 0.95 1000 x 100 x 0.55 1050 x 500 x 0.35

x 100

= = = = = =

Rs.80000 Rs.32500 Rs.23750 Rs.55000 Rs.183750 Rs.870000

Again this value is equated to the index number 100. Free float capital at current date A Ltd = B Ltd = 20 x 10000 x 0.80 75 x 1000 x 0.65 = = Rs.160000 Rs.48750

C Ltd = D Ltd = E Ltd = Total

120 x 250 x 0.95 800 x 100 x 0.55 1020 x 500 x 0.35

= = = =

Rs.28500 Rs.44000 Rs.178500 Rs.459750

The index number on the current date works out to be Current market price = old base market x new market capitalization Capitalization old market capitalization

459750 x 100 = 870000 Thus the fall in the index is = 47.16% The free float weights are as follows : A Ltd = B Ltd = C Ltd = D Ltd = E Ltd = 160000 / 459750 x 100 48750/459750 x 100 28500/459750 x 100 44000/459750 x 100 178500/459750 x 100 = 34.80% = 10.60% = 6.19% = 9.57% = 38.82%

52.84

Here it is seen that E Ltd, by virtue of it being closely held company loses its weight in Free float index. Price Weighted Index In the price weighted index, the percentage change in price is the deciding factor of the stocks weightage in the index. This methodology takes no note of the market capitalization of the

individual stocks to decide their Weightages in the index. The current index price in a price weighted index is calculated by the formula: P = (Pn Qo/ Po Qo) The following example gives the outstanding shares and prices at index base date and current date. Price weighted value at base date = (Qo x Po) A Ltd = B Ltd = C Ltd = D Ltd = E Ltd = Total 10 x 10000 50 x 1000 100 x 250 1000 x 100 1050 x 500 = = = = = = 100000 50000 25000 100000 525000 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 x 500) 800000 = 895000 = 112 800000 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 a stock is the market price of the stock multiplied by the total number of shares. The market capital of the index is the total market capital of all its constituent stocks. The base market

capital of the nifty is Rs.2.06 tn, which is equated to the index value of thousand points. When the nifty touched 2000 points recently, it meant that its market capital doubled to Rs.4.12 tn. Free float capitalization, the method used for calculating the Sensex, uses only that part of the market capitalization of the company that is traded freely in the market. It disregards holdings by 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 index movements. Now, as to the question of whether free float market capitalization method is better than the full market capitalization method, there seem to be no definite answer. Many international indices like STOXX, The Dow Jones indices and Morgan Stanley Capital International (MSCI) indices are based on free float methodology. Free float indices are said to be better reflectors of market movements as they exclude the illiquid and untraded promoters holdings in their constituent companies. Thus the index reflects changes in the market that arise from actively traded share capital.

Changes in Weightages of Sensex Companies

Compan y Name Ran k Full Mkt 1 2 3 4 5 6 7 8 9 10 11 12 13 Full Mkt Cap (Rs.Cr )
406181 233664 179980 171522 154658 130043 100291 99070 83292 67356 63218 60318 45954

Rel NTPC ONGC BHEL Airtel SBI HUL ITC Infosys TCS Wipro Sunphar ma HDFC

Weigh ts as per Full Mkt (Rs.Cr) 18.44 10.61 8.17 7.79 7.02 5.90 4.55 4.50 3.78 3.06 2.87 2.74 2.09

FF Fact or

FF Mkt Cap (Rs. Cr) 203091 151881 152983 68609 123727 65021 55160 69349 70799 47149 31609 21111 34466

Weigh ts as per Free Float 14.47 10.82 10.9 4.89 8.82 4.63 3.93 4.94 5.05 3.36 2.25 1.50 2.46

Ran k FF

Chang e in Wt

0.50 0.65 0.85 0.40 0.80 0.50 0.55 0.70 0.85 0.70 0.50 0.35 0.75

1 3 2 7 4 8 9 6 5 10 16 18 14

-3.97 0.21 2.73 -2.90 1.80 -1.27 -0.62 0.44 1.27 0.30 -0.62 -1.24 0.37

Rcomm L &T HDFCBan k ICICIBan k DLF Sterlite Maruthis uz TATAPow er Grasim Rel infra TATASte el J.P.Asso TATAMot or ACC Hindalco M&M Ranbaxy

14 15 16

40997 39725 37117 36153

1.86 1.80 1.70 1.64 1.50 1.25 1.14 1.13 0.76 0.68 0.68 0.66 0.64 0.53 0.48 0.47 0.46

0.80 0.90 1.00 1.00 0.80 0.65 0.80 0.65 0.80 0.80 0.80 0.55 0.55 0.90 0.65 0.80 0.70

32797 35752 37117 36153 26401 17925 20110 16181 13374 12052 11923 7991 7712 10504 6802 8294 7144 14031 87

2.34 2.55 2.64 2.58 1.88 1.28 1.43 1.15 0.95 0.86 0.85 0.57 0.55 0.75 0.48 0.59 0.51

15 13 11 12 17 20 19 21 22 23 24 27 28 25 30 26 29

0.48 0.75 0.94

17 18 19 20

33001 27577 25137 24894

0.94 0.38 0.03 0.29

21 22 23 24 25 26 27 28 29 30

16717 15065 14904 14528 14022 11671 10464 10367 10206 2178092

0.02 0.19 0.18 0.17 -0.09 -0.09 0.22 0.00 0.12 0.05

Changes in the Weights of Sensex Constituents To review the changes in the weights of Sensex constituents, we have taken the prices of February 26th, 2009 in the above table and applied the free float factors to the companies to see the change in weightages. At the first glance, it is evident that weightages of the top stocks in the market capital sensex have taken major hits. In fact, NTPC loses its coveted No. 2 position and slips to the 3rd Rank based on the free float sensex. This is because NTPC has only 65% of its shares considered in the modified methodology. NTPC loss becomes ONGC gain, as it moves up to the 2nd spot spurred by its free float of around 85%. It is interesting to note that the big constituents (Rel) have such large market capitals that even 50% decrease in the float adjusted capital of Reliance and NTPC respectively does not change their rankings. However the combined effect of next two giants on the Sensex is up from 18.78% to 21.72% , i.e. an increase of 2.94% points. HDFC Bank is rewarded for its complete free float market capitalization. The company moves up to the 11th position from the 16th spot. Another new age financial institution, ICICI Bank also has no controlling shareholders, which means that it has a free factor of 1 and its rank moves up from the 17th to the 12th position. It is interesting to note that the effect of bottom 10 companies is almost the same 6.49% in full market capitalization methodology and 7.26% in the free float capitalization methodology with meager difference of 0.77%. the market capital of the Sensex in the full market capitalization methodology as on February 26th, 2009 was Rs.21,78,092 cr. Out of this the total value of the shares freely floating in the market translates to Rs.14,03,187 cr, i.e., about 64% of the full market capital. Changes in Sector Weightages

As with the Sensex companies, there have also been some notable changes in the way different industries have been represented in the modified index. Taking a major hit is the pharmaceutical sector, which loses about 1.24% in the total weight and 18th position from the 12th spot. This is because of the low float of 35% of the pharmaceutical companies. The other sector that lost owing to its low free float in the recast is the Engineering and Capital Goods Sector (BHEL). The weight of the sector decreased from 7.79% to 4.49%. the complete market capital of the new age banks ICICI Bank and HDFC Bank being freely available has spurred the weight of banking and financial services 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

Volatility Common Stocks in Nifty and Sensex ACC BHARTI AIRTEL BHEL DLF GRASIM HDFC HDFC BANK HINDALCO Nifty 0.60 7.06 3.92 1.53 0.74 2.07 2.13 0.40 Sensex 0.75 8.82 4.89 1.88 0.95 2.46 2.65 0.48 Excess of Sensex over Nifty 0.15 1.76 0.97 0.35 0.21 0.39 0.52 0.08

HUL ICICI BANK INFOSYS ITC LTD LARSEN AND TURBO MAH & MAH MARUTHI SUZUKI NTPC ONGC RANBAXY LABS RELIANCE IND LTD RELIANCE COMM SBI STERLITE IND SUN PHARMA TATA MOTORS TATA POWER TATA STEEL TCS WIPRO

3.18 2.20 4.04 3.98 2.07 0.47 1.11 8.62 8.69 0.50 11.59 1.85 3.82 1.01 1.23 0.41 0.95 0.68 2.73 1.84 79.42

3.93 2.58 5.05 4.94 2.55 0.59 1.43 10.82 10.9 0.51 14.47 2.34 4.63 1.28 1.5 0.55 1.15 0.85 3.36 2.25 98.56

0.75 0.38 1.01 0.96 0.48 0.12 0.32 2.20 2.21 0.01 2.88 0.49 0.81 0.27 0.27 0.14 0.20 0.17 0.63 0.41

Out of these 28 stocks which are common to both the indices almost 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 to improved diversification and better liquidity position in the nifty. As a measure of volatility, here the standard deviation is used. It is also used to measure the risk of a security. The smaller standard deviation shows the tighter probability distribution and the lower risk associated with the security and vice- versa. The difference in volatility is more pronounced intra day owing to the inferior liquidity of the BSE. The volatility of the Nifty is 2.81% as compared to 3.53% for the Sensex.

Industry Representation in Nifty and Sensex

Industry Cement Telecommunication Pharmaceutical Information Technology Automotives Banking & Finance Construction & Real Estate Oil & Gas

Nifty (%) 1.19 10.45 2.57 9.00 3.02 11.38 3.86 14.13

Sensex (%) 0.75 3.16 2.01 10.66 2.57 12.32 2.45 10.90

Metals & Mining Power Gen & Dist Utilities Food & Beverages Engineering & Cap goods

4.69 12.49 3.92 3.98 5.18

2.61 12.83 21.90 4.94 4.89

The index should be fairly representative of the entire market. All or at least most sectors should be represented in the index in the same weight as they are in the market capital of the entire market. Here, there is a need to distinguish the sector replication 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 the agricultural sector, but the representation of the sector on the bourses (i.e. market capital of listed agrarian companies as a percentage of the market capital of the equity market) is miniscule.

An analysis of the Nifty and the Sensex shows interesting results. 14 industries are represented in the Nifty while the Sensex represent only 13. In addition the largest sector in the Sensex, Utilities represents 21.90% of the index, while Oil and Gas, the largest sector represented in the Nifty covers only 14.13%. The oil and gas industry, an important heavy industry is better represented in Nifty (14.13%) than in the Sensex (10.90%). Thus we can conclude that Nifty is a better representative of the entire market. With Nifty having 50 stocks and Sensex 30, one might have thought that major stocks would influence the Sensex much more than the Nifty. However, the fact is quite contrary to this supposition. The top 10% of the Sensex stocks constitutes only 36.19% of its total free float market capitalization, while the weight of the top 10% of Nifty stocks is 39.98%. likewise in each of the comparisons, the capitalization of the top n% of the Sensex stocks as a percentage of total capitalization is less than that of the Nifty. Conversely the share of the bottom n% of the Sensex is substantially higher than that of the Nifty for all values of n. This analysis shows that a sharp change in the top index constituents will have lesser effect on the Sensex than on Nifty. Therefore the Sensex is less sensitive to individual stock gyrations than the Nifty. This is undoubtly because Sensex change over from 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 stock market. The market price of a stock is said to consist of two components namely the intrinsic value of the share and the liquidity premium. Therefore liquidity plays an important role in deciding the market price after considering its intrinsic value.

The price of any index is made of price of shares included in the index. these shares trade in the market at different prices. The investors prefers the market that provides better liquidity because price tends to be better if more number of investors have participated in the price discovery process. Hence the index which has more of liquidity is certainly reflected in the prices of the stock and the market in a better way in comparison to the market having less liquidity. If we compare the liquidity of two indices, Nifty and Sensex, it is found that the liquidity of Nifty is far better than that of Sensex.

Conclusions & Suggestions

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

 Stock exchanges are the most perfect type of markets for security whether of Government, Semi- Govt or Private bodies. Market index has all been of great importance in the world of security analysis and portfolio management. A stock market index has a wide variety of applications in financial analysis. The ups and downs in the index represent the movements of the equity market. Any investor can look at the performance of the index to find out how the equity market is doing. A sect oral index serves as a lead indicator of the performance of the particular sector. People at different walks of life use the market indicators for speculation. Investors both individual and institutional use the market index as a bench mark against which they evaluate the performance of their portfolio. 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 bench mark the returns of their equity portfolios to one of the two equity market indices the BSE Sensex and the S & P CNX Nifty. Nifty is more stable than Sensex. This is mainly due to improved diversification and better liquidity position in Nifty. Thus Sensex must be made more dynamic and correct bench mark of the Indian equity market.

 A stock index is created to provide investors with information regarding the average share price in stock market. These indices are expected to capture the overall behavior of equity market and need to represent the return obtained by typical portfolios in the country. Nifty is calculated based on full market capitalization methodology whereas Free Float market capitalization is the method used for calculating the Sensex. Free float indices are said to be better reflectors of market movements as they exclude the illiquid and untraded promoters holdings in their constituent companies. Thus the index reflects changes in the market that arise from actively traded share capital. Both Nifty and Sensex are reviewed every quarter. The BSE index committee meets every quarter to review all the BSE indices including the Sensex. Similarly, the Index Maintenance Sub Committee of the NSE meets every three months 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 of Sensex.

Investors should be educated and made aware of the concept of indices for the right selection of index according to their specifications. The concept should be made more transparent and simple to understand.

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

in order to transform them into real time investors and speculators in future. Some training institutes and organizations such as ITIs should be started under the responsibility of stock exchanges to train the investors for the short period, to effect long term investors welfare and phenomenal changes in investment scenario in future.