The National Stock Exchange’s (NSE) decision to replace IPCL with Unitech in its benchmark Nifty index will result in much better representation of the underlying sector-wise break-up of the market. Currently, real estate players have no representation in the index, despite accounting for a substantial 4.7% share of the total market’s capitalization. Unitech’s addition would result in weightage of about 1.75% in the Nifty, giving the sector long-due representation in a mainline index. Real estate stocks are already present in broader indices with 100 and 500 underlying stocks. Also, the exclusion of IPCL wouldn’t really dent the weightage of the oil and gas sector. Its share in the index would reduce from 24.3% to 24%. It’s important to note that this is drastically different from the share of 15.4% the sector has in the overall market’s capitalization. The Sensex is slightly better, assigning a share of 17.1% to the sector.

But, banks and financial firms have a weight of 21.6% in the Sensex, far higher than the underlying market weight of less than 14%. Nifty comes much closer, assigning a weight of 12.8% to the sector. Both indices err by giving a higher than market weight to one of these two sectors. It’s also important to note that the way trading interest has increased for mid-cap shares in the past few years, even 50 stocks seem to be far from enough to reflect the true picture of market movement. On the Bombay Stock Exchange, B1’ group shares are now almost the same as ‘A’ group shares. A year ago, their turnover was about 50% of ‘A’ group turnover. Also, mid-cap shares have given far superior returns in the rally that ensued in 2003. Indices such as the CNX 100 and BSE 100 give a fair representation to such shares. But then, who’s interested? Just like the Dow in the US, the historical value enjoyed by the Sensex ensures that it’s the defining index for the Indian markets.

Foreign debt issues soar

The Bank for International Settlements has recently published data that shows the rapid growth in the foreign debt issued by Indian companies and financial institutions. The outstanding loan amount in respect of such issues has grown from $10.7 billion in December 2005 to $30.7 billion in June 2007, almost trebling in one -and-a-half years. By way of comparison, consider Chinese debt issuances, which went up from $28.3 billion to $34.2 billion over the same period—the rate of growth of Indian debt issuance has been much more rapid. As a matter of fact, no other country in Asia has had such a high rate of growth in debt outstandings. We’re fast catching up with China, at least so far as overseas debt issuances are concerned.

Much of the increase occurred in the first two quarters of 2007, with debt worth $7.7 billion being issued in Q1 and $4 billion in Q2. Small wonder that the rupee appreciated the most among Asian currencies against the dollar, under pressure from these inflows. Also, unlike in China, where financial institutions did most of the borrowing, Indian issuers were mainly corporate.

Moreover, over the same period, corporate rupee debt issues were much lower. Also, announced international equity issues by Indian companies went up from $8.6 billion in 2005 to $10.1 billion in 2006 and further to $9.6 billion in the first two quarters of 2007. That’s much lower than China’s mopping up of $23.3 billion during the first two quarters of 2007. Indian companies seem to prefer raising debt abroad rather than issue equity.

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