A detailed overview of NSE-INDIA & S&P CNX NIFTY

1. Indian Stock Exchange NSE and how
their indices are calculated
by:
Subhankar Nandan (NMBA-47)
Loyola Academy (PG)
Investment Management

2. What is a Stock Exchange?
Stock exchange is that place where trading of
shares is done in terms of sale and purchase.

3. INDIAN STOCK EXCHANGES AND THEIR
INDICES

4. Indices: SENSEX & NIFTY
Stock Market performance is quantified by calculating an
index using the benchmark scrip’s and as known to all
SENSEX (Sensitive Index) is associated with Bombay Stock
Exchange and S&P CNX NIFTY is associated with National
Stock Exchange

5. Stock Exchange Of India Limited - NSE
Definition of 'National Stock Exchange Of India Limited
- NSE'
• The National Stock Exchange is India's largest
financial market. Established in 1992, the NSE has
developed into a sophisticated, electronic market,
which ranks third in the world for transacted
volume. The NSE conducts transactions in the
wholesale debt, equity and derivative markets.
Investopedia explains 'National Stock Exchange Of
India Limited - NSE'
• Based in Mumbai, India, the National Stock
Exchange is a leader in market technology. The
exchange's supports more than 3,000 VSAT
terminals, making the NSE the largest private
wide-area network in the country. The National
Stock Exchange has been a pioneer for Indian
financial markets, being the first electronic limit
order book to trade derivatives and ETFs

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

7. NSE: National Stock Exchange
Type Stock Exchange
Location Mumbai, India
Coordinates 19°3′37″N 72°51′35″E
Founded 1992
Owner National Stock Exchange of India Limited
Key people Ravi Narain (MD)
Currency Indian rupee ( )
No. of listings 1,646
MarketCap US$1 trillion (Jul 2012)[1]
Indexes S&P CNX Nifty
CNX Nifty Junior
S&P CNX 500
Website www.nseindia.com

8. NSE - Corporate Office
National Stock Exchange of India Ltd.
Exchange Plaza,
Plot no. C/1, G Block,
Bandra-Kurla Complex
Bandra (E) Mumbai - 400 051.
Tel No: (022) 26598100 - 8114
Fax No: (022) 26598120
NSE - Branch Offices
Ahmedabad
Mumbai
Office No. 304/305
6th Floor, Kohinoor City, Tower -1,
GCP Business Centre
Commercial - II, Kirol Road,
Opposite Memnagar Fire Station
Off. L.B.S. Marg,
Memnagar
Kurla (W),
Ahmedabad - 380052
Mumbai - 400 070
Tel No : (079) 26420481/ 26420482
Tel. No : (022) 25045300
Fax No : (079) 26420485
Fax No: (022) 25045298
Chennai Delhi
National Stock Exchange of India Ltd 4th Floor,
8th Floor, Arihant Nitco Park, Jeevan Vihar Building
No 90, Dr Radhakrishnan Salai, Parliament Street
Mylapore, Chennai 600 004. New Delhi-110001
Tel No : (044)-28479900 / 28479902-05 Tel No: (011) 23741741, 49393000
Fax No : (044) 28479926/27 Fax No: (011) 23459291, 49393091
Hyderabad
Kolkata
H No.3-6-322
1st Floor, Park View Apartments
Mahavir House, IInd Floor
99, Rash Behari Avenue,
Chamber no.203 & 204
Kolkata – 700 029.
Basheerbagh
Tel No : (033) 4040 0400, 24631802
Hyderabad - 500029
Fax No : (033) 4040 0440, 24631791
Tel No: (040) 23227084, 23227085
Fax No: (040) 23227086

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

10. Objectives
• Establishing nationwide trading facilities for all types of
securities.
• Ensuring equal access to investors all-over the country
through an appropriate communication network.
• Meeting international benchmarks and standards.
• Enabling shorter settlement cycles and book entry
settlements.

11. Products

12. NSE has launched several stock indices, including
• S&P CNX Nifty (Standard & Poor's CRISIL NSE Index)
• CNX Nifty Junior
• CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)
• S&P CNX 500 (= CNX 100 + 400 major players across 72
industries)
• CNX Midcap (introduced on 18 July 2005 replacing CNX
Midcap 200)

13. S&P CNX Nifty
• The S&P CNX Nifty, also called the Nifty 50 or simply the Nifty, is a stock market index
and benchmark index for indian equity market. Nifty is owned and managed by
India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and
CRISIL (Credit Rating and Information Services of India Ltd). IISL is India's first
specialized company focused upon the index as a core product. IISL has a marketing
and licensing agreement with Standard & Poor's for co-branding equity indices. 'CNX'
in its name stands for 'CRISIL NSE Index'.
• S&P CNX Nifty has shaped up as the largest single financial product in India, with an
ecosystem comprising: exchange traded funds (onshore and offshore), exchange-
traded futures and options (at NSE in India and at SGX and CME abroad), other index
funds and OTC derivatives (mostly offshore).

14. • Graph of S&P CNX Nifty from January 1997 to March 2011
• The S&P CNX Nifty covers 22 sectors of the Indian economyand offers investment
managers exposure to the Indian market in one portfolio. The S&P CNX Nifty stocks
represents about 67.27% of the free float market capitalization of the stocks listed at
National Stock Exchange (NSE) as on September 30, 2012.
• The S&P CNX Nifty index is a free float market capitalisation weighted index. The index
was initially calculated on full market capitalisation methodology. From June 26, 2009,
the computation was changed to free float methodology. The base period for the S&P
CNX Nifty index is November 3, 1995, which marked the completion of one year of
operations of NSE's Capital Market Segment. The base value of the index has been set at
1000, and a base capital of Rs 2.06 trillion. [1] The S&P CNX Nifty Index was developed by
Ajay Shah and Susan Thomas.

15. Currency of Calculation
• For the S&P CNX Nifty, all prices are in Indian
rupees.
Base Date
• The base period for the S&P CNX Nifty index is
November 3, 1995, which marked the completion
of one year of operations of NSE's Capital Market
Segment. The base value of the index has been set
at 1000, and a base capital of Rs 2.06 trillion.

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

17. Highlights
• The S&P CNX Nifty is a 50 stock, float-adjusted market-
capitalization weighted index for India, accounting for 21
diversified sectors of the economy. It is used for a variety
of purposes, such as benchmarking fund portfolios, index
based derivatives and index funds.
• The S&P CNX Nifty is derived from economic research and
is created for those interested in investing and trading in
Indian equities.

18. Market Representation. & Diversification.
Market Representation.
• The S&P CNX Nifty stocks represent about 65% of the total float-
adjusted market capitalization of the National Stock Exchange (NSE).
Diversification.
• The S&P CNX Nifty is a diversified index, accurately reflecting the
overall market. The reward-to-risk ratio of S&P CNX Nifty is higher
than other leading indices, offering similar returns but at lesser risk.

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

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

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

22. S&P CNX Nifty companies of India
As of 28 Sep 2012:
• ACC • HDFC Bank • Power Grid Corporation
• Ambuja Cements • Hero MotoCorp • PNB
• Asian Paints • Hindalco Industries • Ranbaxy Laboratories
• Axis Bank • HUL • Reliance Infrastructure
• Bajaj Auto • Infosys • Reliance Industries
• Bank of Baroda • ICICI Bank • Sesa Goa
• BHEL • IDFC • Siemens
• BPCL • ITC Limited • SBI
• Bharti Airtel • Jaiprakash Associates • Sun Pharmaceutical
• Cairn India • Jindal Steel and Power • TCS
• Cipla • Kotak Mahindra Bank • Tata Motors
• Coal India • L&T • Tata Power
• DLF • Lupin • Tata Steel
• Dr. Reddy's Laboratories • Mahindra & Mahindra • Ultratech Cement
• GAIL • Maruti Udyog • Wipro
• Grasim Industries • NTPC
• HCL Technologies • ONGC
• HDFC

23. HOW ARE INDICES OF SENSEX AND NIFTY
CALCULATED???

24. How are the SENSEX 30 & NIFTY 50 Stocks
are selected?
• Listing History
• Trading Frequency
• Rank based on the Market Cap (Should be Among top 100)
• Market Capitalization weight
• Industry / sector they belong
• Historical Record

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

26. Why Free Flow Market Cap?
1. It depicts the market more rationally
2. It removes undue influence of government or promoter share
holding, there by giving the equal opportunity for companies to be
in the NIFTY
3. Almost all the Indices world over are calculated by this
methodology
4. It gives Fund managers more authentic information for
benchmark comparisons.

27. SENSEX & NIFTY CALCULATION METHODOLOGY

28. • SENSEX is calculated using the "Free-float Market
Capitalization" methodology, wherein, the level of index at any
point of time reflects the free-float market
• It reflects value of 30 component stocks relative to a base
period.
• The market capitalization of a company is determined by
multiplying the price of its stock by the number of shares
issued by the company.
• This market capitalization is further multiplied by the free-float
factor to determine the free-float market capitalization.

29. • The base period of SENSEX is 1978-79 and the base value is 100 index
points. ( notation 1978-79=100).
• The calculation of SENSEX involves dividing the free-float market
capitalization of 30 companies in the Index by a number called the Index
Divisor.
• The Divisor is the only link to the original base period value of the SENSEX.
It keeps the Index comparable over time and is the adjustment point for all
Index adjustments arising out of corporate actions, replacement of scrip’s
etc.
• During market hours, prices of the index scrip's, at which latest trades are
executed, are used by the trading system to calculate SENSEX every 15
seconds. The value of SENSEX is disseminated in real time.

30. How SENSEX is calculated?
The formula for calculating the SENSEX = (Sum of free flow
market cap of 30 benchmark stocks)*Index Factor
where,
Index Factor = 100/Market Cap Value in 1978-79.
100 is the Index value during 1978-79.

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

32. (300*100+500*200) = 30000+100000 = Rs. 130000
Assume Market Cap during the year 1978-79 was Rs.25000
Then SENSEX = 130000*100/25000 = 520.
The methodology in the example is exactly followed to calculate
the SENSEX, only difference being the inclusion of 30 stocks.

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

34. Index Closure Algorithm
• The closing SENSEX & NIFTY on any trading day is computed taking the
weighted average of all the trades on SENSEX & NIFTY constituents in the
last 30 minutes of trading session.
• If a SENSEX & NIFTY constituent has not traded in the last 30 minutes, the
last traded price is taken for computation of the Index closure.
• If a SENSEX & NIFTY constituent has not traded at all in a day, then its last
day's closing price is taken for computation of Index closure.
• The use of Index Closure Algorithm prevents any intentional manipulation
of the closing index value.
•

35. NIFTY
The National Stock Exchange (NSE) is associated with NIFTY and
it is also calculated by the same methodology but with two key
differences.
1. Base year is 1995 and base value is 1000.
2. NIFTY is calculated based on 50 stocks.
Everything else remains the same in NIFTY Index calculation as
well.

36. Benefits of Stock Exchanges to Community
1. It assist the economies development by providing a body of
interested investors.
2. It uploads the position of superior enterprises and assist them
in raising further funds.
3. It encourages capital formation
4. Government can undertake projects of national importance and
social value raising funds through the sale of its securities on
the stock exchange.
5. It is the stock exchanges that central bank of a country can
control credit by undertaking open market operations
(purchase and sale of securities)

37. Benefits to Investor
1. Liquidity of the investment is increased
2. The securities dealt on a stock exchange are good collateral
security for loans.
3. The stock exchange safeguards interests of investors
through strict enforcement of rules and regulations.
4. The present net worth of investments can be easily known
by the daily quotations.
5. The risk is considerably less when investor holds or
purchases listed securities.

38. Benefits to the company
1. A company whose shares quoted on stock exchange they
enjoy better reputation and credit.
2. The market for the shares of such a company is naturally
widened.
3. The market price of securities is likely to be higher in relation
to its earnings, dividends and property values. This raises the
bargaining power of the company in the event of a takeover,
merger or amalgamation.

39. ADJUSTMENTS FOR BONUS, RIGHTS AND
NEWLY ISSUED CAPITAL

40. Adjustment for Bonus, Rights and Newly
Issued Capital
• NIFTY calculation needs to be adjusted for issue of Bonus or Rights
shares, If no adjustments are made, a discontinuity would arise
between the current value of the index and its previous value
despite the non-occurrence of any economic activity of substance
• At the NSE Index Cell , the base value is adjusted, which is used to
alter market capitalization of the component stocks to arrive at the
NIFTY value.

41. Adjustments for Rights Issues
• When a company, included in the compilation of the index, issues
right shares, the free-float market capitalization of that company is
increased by the number of additional shares issued based on the
theoretical price.
• An offsetting or proportionate adjustment is then made to the Base
Market capitalization (see 'Base Market capitalization Adjustment'
below).

42. 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.

43. Base Market capitalization Adjustment
• The formula for adjusting the Base Market capitalization is as follows:
New Market capitalization
New Base Mkt. cap. = Old Base Mkt. cap. x -------------------------------
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

44. • 2450 x (4781+100)
-------------------------- =Rs.2501.24crores
4781
• This figure of Rs. 2501.24 crore will be used as the Base Market
capitalization for calculating the index number from then onwards
till the next base change becomes necessary.

45. Bibliography:
NSE web site
NSE brochure
Wikipedia
Yahoo answer

46. THANK YOU