InvestorQ : What are the approaches to index construction that is adopted with respect to the Nifty index?
Crowny Pinto made post

What are the approaches to index construction that is adopted with respect to the Nifty index?

2 years ago

The NIFTY 50 is computed using a float-adjusted, market capitalization weighted methodology, 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 methodology also takes into account constituent changes in the index and corporate actions such as stock splits, rights issuance, etc., without affecting the index value.

Beginning June 26, 2009, the NIFTY 50 is being computed using float-adjusted market capitalization weighted method, wherein the level of index reflects the float-adjusted market capitalization of all stocks in the Index.

Currency of Calculation

For the NIFTY 50, all prices are in Indian rupees.

Base Date

The base period for the NIFTY 50 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

Index Maintenance consists of the following key activities

It is all about rebalancing the index when it is warranted. Index maintenance plays a crucial role in ensuring the stability of the index, as well as in meeting its objective of being a consistent benchmark of the Indian equity markets. Changes in the index level reflect changes in the market capitalization of the index which are caused by stock price movements in the market. They do not reflect changes in the market capitalization of the index, or of the individual stocks, that are caused by corporate actions such as dividend payments, stock splits, distribution to shareholders, mergers or acquisitions.

When a stock is replaced by another stock in the index, the index divisor is adjusted so the change in index market value that results from the addition and deletion does not change the index level.

What is the calculation frequency? The index is calculated real-time on all days that the National Stock Exchange of India is open.

Corporate Actions and Share Updates

Maintaining the NIFTY 50 index includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends etc. Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the index. Other corporate actions, such as share issuances, change the market value of an index and require a divisor adjustment to prevent the value of the index from changing.

Adjusting the divisor for a change in market value leaves the value of the index unaffected by the corporate action. This helps keep the value of the index accurate as a barometer of stock market performance, and ensures that the movement of the index does not reflect the corporate actions of the companies in it. Divisor adjustments are made after the close of trading and after the calculation of the closing value of the index. Any change in the index divisor also affects corresponding sub-indices and divisors. Each sub-index is maintained in the same manner as the headline index.

Corporate actions such as splits, stock dividends, rights offerings, and share changes are applied on the ex-date. All singular instances of share changes arising out of additional issue of capital, such as ESOPs, QIPs, ADR/GDR issues, private placements, warrant conversions, and FCCB conversions, which have an impact of 5% or more on the issued share capital of the security are implemented as soon as possible after providing a five days’ notice period. Share repurchase (buyback) also have the same rules as applicable to share changes.

Changes entailing less than 5% impact on the issued share capital or a free-float are accumulated and implemented from the first working day after F&O expiry of March, June, September and December after providing five working days’ prior notice.

Where cumulative share changes exceed 5% of the issued share capital within a quarter, such changes are implemented after providing five working days’ prior notice, from the date when such cumulative changes exceeded 5%.

Investible Weight Factors (IWFs)

IWF as the term suggests is a unit of floating stock expressed in terms of a number available for trading and which is not held by the entities having strategic interest in a company. Higher IWF suggest greater number of shares held by the investors as reported under public category within a shareholding pattern reported by each company.

The IWFs for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges on quarterly basis accumulated and implemented on quarterly basis from March, June, September and December effective after the expiry of the F&O contracts.

The following categories are excluded from the free float factor computation:

Shareholding of promoter and promoter group

Government holding in the capacity of strategic investor

Shares held by promoters through ADR/GDRs.

Strategic stakes by corporate bodies

Investments under FDI category

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

Employee Welfare Trusts

Shares under lock-in category