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4.1 What is the BSE SENSEX Index 4.2 What are the objectives of the SENSEX 4.3 What are the criteria for selection of scrips for the SENSEX 4.4 When was the SENSEX last revised 4.5 What industries are represented in the SENSEX and in what ratio. 4.6 What companies are represented in the SENSEX 4.7 What is the beta of SENSEX scrips 4.9 Is SENSEX A GOOD representative of market movements 4.11 How are adjustments made for Bonus, Rights and Newly issued Capital 4.12 With what frequency is SENSEX calculation done 4.13 How is the closing price of SENSEX calculated
The BSE SENSEX, short form of Sensitive Index, first compiled in 1986 is a "Market Capitalization-Weighted" index of 30 component stocks representing a sample of large, well-established and financially sound companies. The index is widely reported in both, the domestic and international, print and electronic media and is widely used to measure the performance of the Indian stock markets. The BSE SENSEX is the benchmark index of the Indian capital market and one, which has the longest social memory. In fact the SENSEX is considered to be the pulse of the Indian stock markets. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors. Further, as the oldest index of the Indian Stock market, it provides time series data over a fairly long period of time. Small wonder, that the SENSEX has over the years has become one of the most prominent Brand in the Country.
4.2 What are the objectives of BSE SENSEX The BSE SENSEX is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors and fund managers. The objectives of the index are:
Given its long history and its wide acceptance, no other index matches the BSE SENSEX in reflecting market movements and sentiments. SENSEX is widely used to describe the mood in the Indian Stock markets.
The inclusion of Blue chip companies and the wide and balanced industry representation in the SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.
Institutional investors, money managers and small investors all refer to the BSE SENSEX for their specific purposes The BSE SENSEX is in effect the proxy for the Indian stock markets. Since SENSEX comprises of leading companies in all the significant sectors in the economy, we believe that it will be the most liquid contract in the Indian market and will garner a pre-dominant market share.
4.3 What are the criteria for selection of scrips for the SENSEX MARKET CAPITALISATION The scrip should figure in the top 100 companies listed by market capitalization. Also market capitalization of the scrip should be more than 0.5 % of the total market capitalization of the Index i.e. the minimum weightage should be 0.5 %. Since the BSE SENSEX is a market capitalization weighted index, this is one of the entry criteria for scrip selection. INDUSTRY REPRESENTATION Scrip selection would take into account a balanced representation of the economy. The index companies should be leaders in their industry group with sound management. TRADING FREQUENCY The scrip should have been traded on every trading day for the last six months. Exceptions can be made for extreme reasons like scrip suspension etc. NUMBER OF TRADES The scrip should be among the top 150 companies listed by average number of trades per day for the last six months. VOLUME TRADED The scrip should be among the top 150 companies listed by average Volume traded per day for the last six months. CONTINUITY Whenever the composition of the index is changed, the continuity of historical series of index values is re-established by linking the value of the revised index to its last previous value prior to the review. This is done by changing the base value of the index to the extent of the percentage change in the market capitalisation of the index because of the revision. The back calculation over the last one year period would be carried out and correlation of the revised index to the old index should not be less than 0.98 to ensure that the historical continuity of the index is maintained.
4.4 When was the SENSEX last revised The SENSEX was last revised in March 2000. Over the last decade, Indian economy has made successful transition, first from a manufacturing economy to a service economy and now towards a predominantly knowledge economy. To reflect this, in November 1998, Infosys Technologies and NIIT were included in the SENSEX to give representation to the emerging software sector. Today, more companies from the knowledge sector are required to be included in a market Index to show the changing pattern of the economy. With the changing face of Global Economy that is fast transiting from being a manufacturing economy to a Knowledge economy and the increasing dominance of the new generation companies that have pioneered this structural change, it was felt that the BSE Sensitive Index needed to be reviewed. The SENSEX has historically been the barometer of the Indian capital markets and as such a reconstitution was mandatory in order to represent the true face of the national economy. The Index Committee me ton 11th March 2000 to review and propose suitable changes in the BSE SENSEX. The present reconstitution essentially meant altering some of the stocks that have become less prominent and replace them by new economy stocks. The Index Committee has done so in a manner that maintains continuity so that million of investors do not have to relearn past peaks and bottom levels. The following changes were made in the existing SENSEX
The revamped SENSEX captures the Indian economy more realistically. This is evident from the following data, which reveals the comparative figures of weightages of various sectors in the UNIVERSE with the SENSEX. The relevant figures for OLD SENSEX and S&P CNX NIFTY, have also been included in the table.
4.5 What industries are represented in the SENSEX and in what ratio. INDUSTRY WEIGHTAGE IN THE SENSEX
(AS ON APRIL 10, 2000, Pre-Open) 4.6 What companies are represented in the SENSEX
4.7 What is the beta of sensex scrips Beta measures the sensitivity of a scrip movement relative to movement in the the SENSEX Statistically Beta is defined as: Beta = Covariance(SENSEX, Stock )/ Variance(SENSEX) Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX and SENSEX scrips TABLE below gives the Beta values for SENSEX stocks for the period April 1999 – March 2000.
4.8 How Volatile is SENSEX Volatility comparison between SENSEX and other major global and local indices in last one year
BSE SENSEX historical daily volatility The table below gives daily volatility since 1991. It suggests that the daily volatility has declined significantly in the last five years (1994-99), being about 1.5% compared to well over 2% in the early nineties (1991-93). In the last financial year (1998-99), however, there was resurgence in the volatility due to political uncertainty in India, East Asian crisis and the turmoil in the international markets. Table - BSE Sensitive Index Daily Volatility 1991-99
4.9 How can we say that the SENSEX is a good representative of market movements Correlation of BSE SENSEX with major global and local indices
A correlation test run on the BSE SENSEX along with the other major indices in the country shows interesting results indeed. The high correlation, between SENSEX and the broad based indices, justify the efficiency of BSE SENSEX as a hedging tool compared to the more broad-based indices 4.10 How is SENSEX Computed Base - Year : The financial year 1978-79 was chosen as the base year. Considerations for the choice were the price stability during that year and proximity to the period of introduction of the index. Method of Compilation : The compilation of the index values is based on the 'weighted aggregates' method. Under this method, the price of a component share in the index is weighted by the number of equity shares outstanding, so that each scrip will influence the index in proportion to its respective market importance. The current market value for any particular scrip is obtained by multiplying the price of the share by the number of equity shares outstanding. The index on a day is calculated as the percentage of the aggregate market value of the equity shares of all the companies in the sample on that day to the average market value of the same companies during the base period. This method of compilation has the advantage that it has the necessary flexibility to adjust for price changes caused by various corporate actions. This methodology of calculation is consistent with the methodology applied by the most popular indices of the world. It is a wealth-measuring index where the prices are weighted by market capitalization. In such an index the base period values are adjusted for subsequent rights and new issue of equity. This adjustment prevents a distorted picture and gives an idea of wealth created for shareholders over a period.
4.11 How are adjustments made for Bonus, Rights and Newly issued Capital The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when the composition of the sample changes when one of the component stocks pays a bonus or issues 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 news of substance. At the Exchange, we adjust the base value, which is used to deflate market capitalization of the component stocks to arrive at the SENSEX value. The Research and Statistics Department keeps a close watch on the events that might affect the index on regular basis and carries out daily maintenance. In case of a bonus issue there is no change in the base value, only the number of shares in the formula is updated. Adjustments for Bonus Issue: When a company, included in the compilation of the index, issues bonus shares, the new weight factor will be the number of equity shares outstanding after the bonus issue has become effective. Adjustments for Rights Issues: When a company, included in the compilation of the index, issues right shares, the weight factor for that share is increased by the number of additional shares issued. An offsetting or proportionate adjustment is then made to the Base Year Average (see 'Base Changes' below).: When a company, included in the compilation of the index, issues right shares, the weight factor for that share is increased by the number of additional shares issued. An offsetting or proportionate adjustment is then made to the Base Year Average (see 'Base Changes' below). Other Issues: Weight factors get revised when new shares are issued by way of conversion of debentures, conversion of loans into equity by financial institutions, mergers, etc. The Base Year Average is also suitably adjusted to offset the change in the market value thus added. Similarly, when convertible/non-convertible bonds/debentures, preference shares, etc. are issued as rights to equity shareholders, the Base Year Average is suitably adjusted on the basis of the ex-right price of the equity shares.: Weight factors get revised when new shares are issued by way of conversion of debentures, conversion of loans into equity by financial institutions, mergers, etc. The Base Year Average is also suitably adjusted to offset the change in the market value thus added. Similarly, when convertible/non-convertible bonds/debentures, preference shares, etc. are issued as rights to equity shareholders, the Base Year Average is suitably adjusted on the basis of the ex-right price of the equity shares. Base Changes: The changes are in effect proportional adjustments in the ‘Base Year Average Market Value’ to offset price changes in ‘Market Values’ upon which the index is based. The formula for changing the Base Year Average is as follows: New Base = Old Base x New Market Value To illustrate, a company issues right shares which increases the market value of the shares of that company by say, Rs.100 crores. The existing Base Year Average, say, is Rs.2450 crores and the aggregate market value of all the shares included in the index before the right issue is made is, say Rs.4781 crores. The "New Base Year Average" will then be : 2450 x (4781+100) = Rs.2501.24 crores This figure of 2501.24 will be used as the Base Year Average for calculating the index number from then onwards till the next base change becomes necessary.
4.12 With what frequency is SENSEX calculation done During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every minute and continuously updated on all trading workstations connected to the BSE trading computer in real time. A day's opening, high and low prices are also given by the computer. But the closing prices are calculated using spreadsheet to ensure theoretical consistency.
4.13 How is the closing price of SENSEX calculated The closing index is computed at the end of `continuous trading session’ on the basis of official closing prices of components stocks. The algorithm to calculate the closing prices is as follows:
Weighted average price, calculated as above, would be rounded off to the nearest tick.
4.14 Who maintains the index 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 the rights issue and new capital of the index scrips do not destroy the value of the index. The day-to-day maintenance of the index is done by the exchange and special care is taken to include only those scrips which pass through several filters. In April 1998, the Governing Board of the Exchange has set up an Index Committee. The present index committee has 17 experts which includes representatives from members of the Exchange, FIIs, FIs, academicians, financial analysts and representatives of user-groups.
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