InvestorQ : What are the eligibility criteria for a stock to be included as part of the Nifty 50 index?
Crowny Pinto made post

What are the eligibility criteria for a stock to be included as part of the Nifty 50 index?

2 years ago

There are multiple conditions that have to be met for the stock to be eligible to be included in the Nifty 50 index. Here are a few key criteria that go into the calculation.

Domicile of the Company

The company must be domiciled in India and listed on the NSE.

Eligible Securities

Constituents of NIFTY 100 index that are available for trading in NSE’s Futures & Options segment are eligible for inclusion in the NIFTY 50 index.

Differential Voting Rights

Equity securities with Differential Voting Rights (DVR) are eligible for inclusion in the index subject to fulfilment of criteria given below:

Market capitalisation criteria is measured at a company level by aggregating the market capitalisation of individual class of security meeting the liquidity criteria for the respective index

Free float of DVR equity class share should be at least 10% of free-float market capitalization of the company (voting equity class share and DVR equity class share) and 100% free-float market capitalization of last security in respective index

It should meet liquidity criteria applicable for the respective index

Upon inclusion of DVRs in index, the index may not have fixed number of securities. For example, if DVR of an existing NIFTY 50 constituent is included in NIFTY 50, the NIFTY index will have 51 securities but continue to have 50 companies.

It is possible that the DVR is eligible for inclusion in the index whereas the full voting rights security class is ineligible. In such scenario, the DVRs shall be included in the index irrespective of whether full voting rights share class is part of index

Selection of the index set is based on the following criteria

Liquidity: For inclusion in the index, the security should have traded at an average impact cost of 0.50 % or less during the last six months for 90% of the observations for a portfolio of Rs. 10 crores. Impact cost is the cost of executing a transaction in a security in proportion to its index weight, measured by market capitalization at any point in time. This is the percentage mark-up suffered while buying/selling the desired quantity of a security compared to its ideal price i.e. (best buy + best sell)/2.

Float-Adjusted Market Capitalization: Companies will be eligible for inclusion in NIFTY 50 index provided the average free-float market capitalisation is at least 1.5 times the average free-float market capitalization of the smallest constituent in the index.

Listing History: A company which comes out with an IPO is eligible for inclusion in the index if it fulfils the normal eligibility criteria for the index - impact cost, float-adjusted market capitalization for a three-month period instead of a six-month period. At the time of index reconstitution, a company which has undergone a scheme of arrangement for corporate event such as spin-off, capital restructuring etc. would be considered eligible for inclusion in

the index if as on the cut-off date for sourcing data of preceding six months for index reconstitution, a company has completed three calendar months of trading period after the stock has traded on ex. Basis subject to fulfilment of all eligibility criteria for inclusion in the index.

Trading Frequency: The company’s trading frequency should be 100% in the last six months.

Index Reconstitution: The index is reconstituted semi-annually considering 6 months data ending January and July respectively. The replacement of stocks in NIFTY 50 (if any) is generally implemented from the first working day after F&O expiry of March and September. In case of any replacement in the index, a four weeks’ prior notice is given to the market participants. Additional index reconstitution may be undertaken in case any of the index constituent undergoes a scheme of arrangement for corporate events such as merger, spin-off, compulsory delisting or suspension etc. The equity shareholders’ approval to a scheme of arrangement is considered as a trigger to initiate the exclusion of such stock from the index through additional index reconstitution.

Further, on a quarterly basis indices will be screened for compliance with the portfolio concentration norms for ETFs/ Index Funds announced by SEBI on January 10, 2019. In case of non-compliance, suitable corrective measures will be taken to ensure compliance with the norms.

As part of the semi-annual reconstitution of the index, a maximum of 10% of the index size (number of companies in the index) may be changed in a calendar year. However, the limit of maximum 10% change shall not be applicable for any exclusion of a company on account of scheme of arrangement as stated above.