BSE SENSEX : The Heartbeat Meter of Indian Economy !

SENSEX,launched on January 1, 1986,is undisputedly regarded as the pulse of the domestic stock markets in India.It is reported in both domestic and international markets through print as well as electronic media on a broader level. It has been designed scientifically and is based on a globally accepted construction and review methodology. It was initially launched on full market capitalization method and effective September 01, 2003, calculation method shifted to free-float market capitalization. 

The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also called the BSE 30 (BOMBAY STOCK EXCHANGE)or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange (BSE). The 30 component companies are some of the largest and most actively traded stocks,which are representative of various industrial sectors of the Indian economy.These 30 companies are regarded as heavy-weights in the Indian business scenario.

The base value of the SENSEX is taken as 100 on April 1, 1979, and its base year as 1978-79. On 25 July 2001, BSE launched DOLLEX-30, a dollar-linked version of SENSEX. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology, which is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers of world like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The free-float 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 free-float market capitalization.

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 on a continuous basis.

Major advantages of Free-float Methodology:

• A Free-float index reflects the market trends more rationally and reasonably 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 as we can see in the case of BSE SENSEX,the number of companies is only 30.
• A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-Ã -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 Free-float 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.Thus this method enables an equal and fare opportunity to several low size companies also.
   
• 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. 

The categories of holding which are generally excluded from the 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, which are following:

1 

            1. Shares held by founders/directors/ acquirers which has         control   element

2.  Shares held by Government as promoter/acquirer

3.  Strategic stakes by private corporate bodies/ individuals

4.  Shares held by persons/ bodies with "Controlling Interest" 

5.  Equity held by associate/group companies (cross-holdings) 

6.  Equity held by Employee Welfare Trusts 

7.  Holdings through the FDI Route

8.  Locked-in shares and shares which would not be sold in the open market in normal course.

SENSEX - Scrip Selection Criteria:

1. Equities of companies listed on BSE Ltd. (excluding companies classified in Z group, listed mutual funds, scrips suspended on the last day of the month prior to review date, stocks objected by the Surveillance department of the Exchange and those that are traded under permitted category and SME category) shall be considered eligible.

2. Listing History: The scrip should have a listing history of at least three months at BSE. An exception may be granted to one month, if the average free-float market capitalization of a newly listed company ranks in the top 10 of all companies listed at BSE. In the event that a company is listed on account of a merger / demerger / amalgamation, a minimum listing history is not required.

3. The stock 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.

4. Companies that have reported revenue in the latest four quarters from its core activity are considered eligible.

5. From the list of constituents selected through Steps 1-4, the top 75 companies based on free-float market capitalization (avg. 3 months) are selected as well as any additional companies that are in the top 75 based on full market capitalization (avg. 3 months).

6.  The filtered list of constituents selected through Step 5 (which can be greater than 75 companies) is then ranked on absolute turnover (avg. 3 months).

7.  Any company in the filtered, sorted list created in Step 6 that has Cumulative Turnover of >98%, are excluded, so long as the remaining list has more than 30 scrips.

8.  The filtered list calculated in Step 7 is then sorted by free float market capitalization.  Any company having a weight within this filtered constituent list of <0.50% shall be excluded

9.  All remaining companies will be sorted on sector and sub-sorted in the descending order of rank on free-float market capitalization.

10. Industry/Sector Representation: Scrip selection will generally attempt to maintain index sectoral weights that are broadly in-line with the overall market.

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.

BSE Sensex Live Index as on 2nd of Feb 2013.

Maintenance of SENSEX:

One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical value of the index.

The BSE Index Cell does the day-to-day maintenance of the index within the broad index policy framework set by the BSE Index Committee. The BSE Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The BSE Index Committee comprises of capital market expert, fund managers, market participants and members of the BSE Governing Board.

On-Line Computation of the Index:

During trading hours, value of the Index is calculated and disseminated on real time basis. This is done automatically on the basis of prices at which trades in Index constituents are executed.

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 BSE 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.
• 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

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.

BSE Sensex Live as on 2nd of Feb 2013.

Milestones of BSE SENSEX:

·          January 18, 2013 - The SENSEX on January 18, 2013 closes at 20,039.04 with highest peak in two years.

·         15,000, July 6, 2007 - The SENSEX on July 6, 2007 crossed 15,000 mark.

·         5000, October 11, 1999 - On October 8, 1999, the SENSEX crossed the 5,000-mark.

·         1000, July 25, 1990 - On July 25, 1990, the SENSEX touched the four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.

Major falls:

·         January 21, 2008 --- 1,408.35 points

·         Oct 24, 2008---1070.63 points

·         March 17, 2008 --- 951.03 points

        How do you see importance of  SENSEX for Indian       economy?

    How BSE and NSE are different and interrelated with each        other?

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