‘Strict norms to add stocks on indices’
2 min read . Updated: 19 Mar 2023, 11:17 PM IST
PremiumInclusion or exclusion of stocks from Nifty indices are transparent, non-discretionary, based on criteria such as market capitalization and trading frequency and devoid of human discretion once criteria are crystallized, according to the NSE, the country’s premier stock exchange
MUMBAI : Inclusion or exclusion of stocks from Nifty indices are transparent, non-discretionary, based on criteria such as market capitalization and trading frequency and devoid of human discretion once criteria are crystallized, according to the National Stock Exchange (NSE), the country’s premier stock exchange.
“….inclusion and exclusion of stocks in various Nifty indices on periodic basis have been as per transparent policies. All Nifty indices are maintained by NSE Indices Limited (NSE Indices), a subsidiary of NSE, and are based on index methodologies that are objective, non-discretionary, rules-based, pre-announced and transparent," the exchange said in a press release late Sunday evening.
“The index criteria for including any stock into an index or excluding any existing stock from an index is well defined, documented and made available on NSE and NSE Indices website (www.nseindia.com and www.niftyindices.com). The specific methodology for each Nifty index may be different based on the objective of the index and the underlying market that the index seeks to represent. For example, the inclusion of stocks in Nifty 50, India’s flagship index, is based on free-float market capitalization, impact cost, trading frequency, and availability of stock for trading in the F&O (futures and options) segment of the exchange."
NSE’s comments come in the wake of the Adani Group crisis, which triggered unprecedented volatility in shares of Adani Enterprises, Adani Transmission, Adani Total Gas and Adani Total Gas.
The crisis, which began after US-based short-seller Hindenburg Research cast allegations of corporate malfeasance against the ports to renewable energy conglomerate, has wiped $118.36 billion off the market cap of ten listed entities. Adani Group has denied any wrongdoing and prepaid all of its $2.1 billion share-backed financing and a $500 million bridge loan for financing the acquisition of Ambuja Cement.
On 9 February, global index provider MSCI reduced the weightings of Adani Enterprises, Adani Transmission, Adani Total Gas and ACC, which would result in an estimated $450 million in outflows from these companies. The provider subsequently deferred the weighting cut in Adani Transmission to May as several investors said they couldn’t exit the stocks, which hit lower circuits daily back then.
The action by MSCI resulted in anticipations in certain market quarters of some announcements by NSE, whose Nifty 50 index lists Adani Enterprises and Adani Ports.
However, NSE clarified that “Once the index criteria have been crystallized, NSE Indices or its committees exercise no human discretion in deciding on inclusion or exclusion of stocks in any of its indices. Based on the well[1]defined index criteria available on NSE and NSE Indices website, market participants are able to predict the changes in index constituents in various indices in the upcoming index review."
Furthermore, the NSE added that given the current pre-announced, transparent, rules-based, automatic, non-discretionary regulatory framework for surveillance measures and for index inclusion/ exclusion at NSE, “no human discretion is possible for anyone and this entire process and practice has been running for decades."
NSE Indices is compliant with IOSCO’s Principles for Financial Benchmarks and follows a strong index governance practise through various governance committees to monitor index criteria policy changes or policies related to constituent index changes. These committees also include external independent members.
