The Indian equity market was in the midst of turmoil a hundred years ago, as the speculative boom after the end of World War 1 ended. The colonial government set up a committee in 1923 to take a closer look at the operations of the Native Share and Stock Brokers’ Association of Bombay, aka the Bombay Stock Exchange. The report of the committee has data on perhaps the first index of tradable securities — dominated by textile companies — with July 1914 prices as the base. “Considerable difficulty was experienced from the absence of daily official lists … It is desirable that the Bombay Stock Exchange should publish daily official lists on the lines of the London Stock Exchanges and similar exchanges. Where considerable fluctuations take place it is desirable that the opening, closing, highest and lowest prices should be known," the committee members complained in their report.
Such a lack of basic price information is worth recalling at a time when a lot of attention has been focused in recent days on the fortieth anniversary of the benchmark BSE Sensitive Index (Sensex). As Narendra Nathan pointed out in the Economic Times, the Sensex was set up only in 1986, though its base is 1979. The Reserve Bank of India constructed an index of traded securities in 1949, but Indian investors had to wait till 1986 for a credible daily gauge of market movements.
The list of 30 companies that make up the Sensex have changed since 1986. The changing composition of the benchmark index offers interesting clues about the changing nature of the Indian corporate sector.
The first iteration of the Sensex was dominated by the Tata Group. There were as many as six Tata companies in the index — ACC, Tata Power, Tata Steel, Tata Motors, Voltas and Indian Hotels. The extended Birla Group had another five — Century Textiles, Grasim, Indian Rayon, Hindalco and Hindustan Motors. The Sensex now is less dominated by a few groups although there are still three Tata companies in the list.
There has been a lot of churn in the Sensex over the decades. Corporate power in India seems to be more fragile than usually understood. Only a handful of companies such as Tata Motors, Hindustan Unilever, Mahindra & Mahindra, ITC, and Larsen & Toubro have managed to hold their place in the index. Many of the older industrial houses such as the Thapar group, the Walchand group and the Kirloskar group have slipped out of the benchmark index. Even the real estate and infrastructure giants who had a strong presence in the Sensex a decade ago — Jaiprakash Associates, Reliance Infrastructure and DLF, for example — are no longer in the index.
The frequent churn in the Sensex is as much as a testament to the dynamic nature of the Indian economy as the decline of a once-dominant airline, Jet Airways, which suspended operations last week. As these pages have pointed out earlier, the churn in top listed firms in India has been much more than even the US in the post-liberalization era.
A close look at the components of the Sensex also offers useful clues about the changing nature of the Indian economy. The first version of the Sensex was almost entirely dominated by manufacturing. As the services and non-tradable sectors have grown, the role of manufacturing has declined. The second reason is that areas that were once the monopoly of the public sector have been opened up to private sector participation after the 1991 reforms. Banking and telecom are two obvious examples. There are now nine financiers in the Sensex, if one includes HDFC and Bajaj Finance. Manufacturing companies in the Sensex have halved to 13 from 26 in 1988.
Eight of the current Sensex companies began operations, sometimes under a different name, before independence in 1947. These are Bajaj Auto (1943), Tata Motors (1945), ITC (1910), Mahindra & Mahindra (1945), Tata Steel (1907), Hindustan Unilever (1931), Asian Paints (1945) and Larsen & Toubro (1938). One could add the State Bank of India to the list if one traces its roots to the older Presidency Banks set up in the colonial era.
Some of the younger firms in the Sensex are Kotak Mahindra Bank (1985), Bharti Airtel (1984), Sun Pharmaceuticals (1983), Yes Bank (2004), Hero MotoCorp (1983), Infosys (1981), Maruti Suzuki (1983), HDFC Bank (1994), IndusInd Bank (1994) and Axis Bank (1994).
Another interesting trend is the decline on the multinational corporations (MNCs) that have foreign roots. Hindustan Unilever and ITC are the only two MNCs in the Sensex how. This is partly because of the fact that some MNCs have delisted their India subsidiaries over the years and also that newer MNCs that have expanded in India have decided not to list in the domestic stock market, narrowing the investment opportunities for Indian investors. There were seven MNCs in the Sensex in 1999 — Colgate Palmolive, Nestle, Glaxosmithkline Pharmaceuticals, Novartis, Hindustan Unilever, Castrol and ITC.
The changing composition of the Sensex tells us two big stories — of the rise of a new generation of Indian firms as well as the shift from manufacturing towards services.
Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute.
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