Adani Enterprises has a 'high chance' of replacing Shree Cement in the benchmark Nifty in the semi-annual index review in September, a report by Edelweiss Alternative & Quantitative Research stated. The changes in the index are likely to be announced in the second half of August, and the rebalancing date is going to be September 30.
As per the report, Adani Enterprises at present meets all the requirements to make it to the benchmark index. If the stock is indeed added to the Nifty 50 index, it will be a big boost for the stock as it will result in passive inflows of $183 million, Edelweiss estimates.
The report added that the recently-listed Life Insurance Corporation of India could also make it to the Nifty Next 50 index. Meanwhile, Tata Power, Adani Wilmar, IRCTC, Mphasis, Motherson Sumi Systems and Shree Cement are likely to get included in the Nifty Next 50.
Nifty’s next rebalancing announcement is usually done during the second half of August, while the cut-off date to compute the changes in index components is July 29, added the report, however any changes in share prices between now and July-end could alter the equations, it informed.
Now let's understand some basics. On what criteria do stocks get included or excluded from the benchmark index and how does it actually impact the stocks.
What is Nifty50?
The Nifty50 is the flagship index on the National Stock Exchange of India (NSE). The Index tracks the behavior of a portfolio of blue-chip companies, the largest and most liquid Indian securities. It includes 50 of the approximately 1600 companies traded on NSE and captures approximately 65 percent of its float-adjusted market capitalization.
The index covers major sectors of the Indian economy and offers investment managers exposure to the Indian market in one efficient portfolio. The Index has been trading since April 1996.
How is the Nifty computed?
According to the NSE, the index is computed using the free-float market capitalization-weighted method. Under this, the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The period, in this case, is the close of prices on November 3, 1995, which marks the completion of one year of operations of NSE's Capital Market Segment.
It must be noted that the method also considers constituent changes in the index and corporate actions such as stock splits, rights, etc without affecting the index value, added NSE.
What are the criteria for the selection of stocks?
As per NSE, “for inclusion in the index, the security should have traded at an average impact cost of 0.50 percent or less during the last six months for 90 percent of the observations for a basket size of ₹2 crore.”
Other factors that are also necessary for inclusion in the index include
1. A stock could come under consideration once it has come out of an IPO, if it fulfills the parameters such as impact cost, market capitalisation and floating stock, for a 3- month period than a 6-month period.
2. Availability for trading in the derivatives segment.
3. Developments such as corporate actions, and delisting, among others, could lead to a replacement of the stock. The stock with the largest free-float market cap and satisfying other requirements related to liquidity, turnover and free float will be considered for inclusion, the portal added. Also, the stock should have at least twice the float-adjusted market capitalisation of the current smallest index constituent.
4. A list of new eligible stocks is drawn up to review against the current index constituents twice a year and in case any changes are to be made, then the smallest constituents are excluded and new stocks replace them.
Also, 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 inclusion and exclusion does not change the index level, NSE informed.
Is it bad for a stock to get excluded?
It is not necessarily bad. Many times when the parameters are changed for inclusion/exclusion in the Nifty and the stock could have performed steadily but still might get excluded. Having said that, most firms that get excluded do decline in a knee-jerk reaction after their exclusion is announced while the stocks getting included gain.
Can companies be re-included in the index?
Yes. If they fulfil the above-mentioned criteria and perform steadily, they could be re-included in the future.