Sunday, May 24, 2009

Stock Exchanges in India – BSE and NSE

There are two national stock exchanges in the country, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Most large brokers hold membership cards in both exchanges, offering investors a choice of placing their trades on either bourse. 

Bombay Stock Exchange (BSE)

The BSE is the oldest stock exchange in the country, established in 1875. It was structured as a membership based firm, an Association of Persons. It is now a demutualised and corporatised entity, falling in line with Sebi's guidelines on demutualization of stock exchanges. The purpose is to separate ownership and management to prevent any conflicts of interest. 

The BSE is managed by a Board of Directors, comprising professionals, trading member representatives and has a managing director too. The Board formulates larger policy issues and exercises overall control. The managing director takes care of daily operations. The exchange is present in 417 cities in India. 

Types of MembersNumbers
Indian companies719
Foreign Institutional Investors22

Source :, as of Feb’07

Business Transacted on the BSE
There were 7639 scrips that are listed on the BSE. Not all are actively traded, with the number of scrips traded in Feb’07 at 2602. The average cash segment daily turnover on the BSE was Rs 4,675 crore in Feb’07 and the market capitalization of scrips listed on the BSE was Rs 34.9 lakh crore. The derivatives segment turnover in the month of Feb’07 was Rs 13,189 crore in Feb’07. 

These statistics keep changing, to get an update on the latest statistics, go to This link in particular may give you current information :

BSE Indices
The BSE maintains several stock indices that are popular among investors. The following are some of the closely watched indices. 
BSE Sensitive Index (BSE-30)
BSE National Index (BSE-100) or BSE 100
BSE-200 and the Dollex
Apart from these, there are a host of other indices which focus on certain sections of stocks like small cap and mid-cap stocks. Then there are various other indices that are focused on sectors. These indices are updated on a real time basis in market hours. 
The most popular index is the BSE Sensitive Index, the Sensex. 

BSE Sensitive Index (Sensex)
Coverage : 
Originally, it comprised 30 companies from both the "specified" i.e., ‘A’ group and the "non-specified" i.e., ‘B1 & B2’ groups. However, at present all the securities included in the Sensitive Index are specified group shares. These shares are selected on the basis of their liquidity, depth, and floating-stock-adjusted depth, as well as on the basis of industry representation.
Method of compilation : 
The compilation of the index values is based on the 'weighted aggregates' method. In this method, the number of equity shares outstanding for that stock weights the price of a component share in the index. This way, each security will influence the index in proportion to its relative importance in the market. When the price of a share is multiplied by the number of its equity shares outstanding, the result is the current market value for that particular security. 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 for that index. This method of compilation has the advantage that it has the necessary flexibility to adjust for price changes caused by various corporate actions. The methodology is the same as that employed in many popular indices such as the Standard & Poor’s 500, Dow Jones Index, Hang Seng Index, NYSE Composite Index and FT-SE 100 Index.
It is a wealth-measuring index where the prices are weighted by market capitalization. Initially, the index was computed on full market capitalization but since April 2003, it has moved to a free float market capitalization method. 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 investors over a period.
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. One of the important aspects of maintaining continuity with the base year is to update the base year average. The base year value adjustment ensures that the rights issue and new capital of the index securities do not destroy the value of the index.
On-line computation of the index : 
During market hours, the BSE’s computers automatically use the prices of the index securities at which trades are executed to calculate the Sensex in a process of continuous updation.
Reconstitution of the BSE Sensitive index : 
Reconstitution is being carried out whenever required because some stocks might have lost their liquidity or investors may have found some new industry specific fancy. Base change calculation: 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.

National Stock Exchange of India Limited (NSE)

The NSE was set up in 1992 by leading financial institutions (IDBI, LIC, UTI, ICICI, SBI and others) and was the first one to offer screen based trading all over India. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company. 
NSE is different from most other stock exchanges in India where membership on an exchange also meant ownership of the exchange. At the NSE, the ownership and management of the exchange are completely separate. 

Governing body
A board of directors manages the exchange. The board delegates decisions relating to market operations to an executive committee, which includes representatives from the exchange’s trading members, the public and the management.
Besides, the exchange operates various committees to advise it on areas such as good market practices, settlement procedures, risk containment systems etc. Industry professionals, trading members and exchange staff man these committees. The day-to-day management of the exchange is delegated to the managing director who is supported by a team of professional staff.
There are 789 members (as of Feb 28 ’07) who can trade on both the capital market and derivatives segments. There are 150 members who can trade only on the capital market segment. There are 47 members who can trade on the capital market, wholesale debt market (WDM) and derivatives’ segments. There are 9 members who can trade on WDM and capital market segments, and 7 who can trade only on WDM. In all, there are 1002 members. 

Number of listed companies
On the capital market segment, 1,462 companies are available for trading.
On the wholesale debt market segment, 3,216 securities are available for trading. Capital market operations data
The turnover on the NSE has increased from Rs 1,805 crore in 1994-95 to Rs 15.69 lakh crore in 2005-06.
The average daily traded volume has increased from Rs 17 crore during 1994-95 to Rs 6,253 crore during 2005-06.
The total market capitalization has increased from Rs 363,350 crore as of end March 1995 to Rs 28.13 lakh crore as of end March 2006.
Number of shares traded has increased from 0.007 billion in November 1994 to 8.57 billion in March'06.
The average daily turnover in the derivatives segment was Rs 37,000 crore in Feb’07.
Classification of Listed Securities
On NSE, securities for account period settlement are classified as ‘EQ’ segment or ‘Normal’ segment. For book entry i.e. rolling settlement, the securities are traded in two separate segments known as ‘AE Segment’ and ‘BE Segment’. In case of AE segment, dematerialised securities are traded only in market lots, whereas in BE segment these can be traded in multiples of one share. 

NSE Indices
The popular indices of NSE are : 
S&P CNX 500
CNX Industry Indices
CNX Segment Indices
Method of Computation of Indices
S&P CNX Nifty
S&P CNX Nifty comprises 50 stocks and is a market capitalization weighted index. Stocks are selected based on their market capitalization and liquidity. An important criteria of S&P CNX Nifty is that the impact cost (cost of executing the entire set of S&P CNX Nifty securities) is low, making it an optimal index for derivatives trading. The S&P CNX Nifty represents about 58% the total market capitalization of the stocks listed on the Indian bourses as of Dec 29, 2006. The Impact cost (explained in latter part of the article) of S&P for a portfolio of Rs 5 million is 0.08 per cent.
S&P CNX Defty 
Defty is a dollar denominated index based on the S&P CNX Nifty. Computations are done using the S&P CNX Nifty index calculated on the NEAT trading system of NSE and USD Rupee exchange rate that is based on the real time polled data feed
CNX Nifty Junior
CNX Nifty Junior comprises 50 stocks and is a market capitalization weighted Index. The next rung of liquid securities after the Nifty are included in the Junior Index. The Impact cost for CNX Junior Portfolio size of Rs 2.50 million is 0.14% per cent. The CNX Nifty Junior represents about 10% per cent of total market capitalization of all equity shares as on Sep 29’06.
S&P CNX 500 Equity Index 
The S&P CNX 500 Equity Index comprises 500 stocks and is market capitalization weighted. Stocks are selected based on their market capitalization, industry representation, trading interest and financial performance. However, the overriding need has been to ensure that the industry weightings in the index dynamically reflect the industry weightings in the market. The S&P CNX~500 Equity Index currently contains 72 industry groups (S&P CNX Industry Indices) representing over 90 per cent of total market capitalization and about 86% per cent of total turnover making it an optimal market benchmark.
S&P CNX Industry Indices 
The S&P CNX industry indices serve as a standard for comparison of the stock market performance of individual companies vis-a-vis their respective peer groups and also enable fund managers to benchmark NAV performance vs. specific industries.
CNX Mid Cap 
CNX Midcap is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. 
The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria :
All the stocks, which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization), shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe.
After step (a), the weightages of the remaining stocks in the universe is determined again.
After step (b), the cumulative weightage is calculated.
After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 per cent (i.e. upto to 74.99 per cent) of the revised universe shall be ignored.
After, step (d), all the constituents of S&P CNX Nifty shall be ignored.
From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100 companies in terms of highest market capitalization, shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below.
CNX Segment Indices 
The reform process in India has resulted in business restructuring and consolidation of the Indian corporate sector. With a view to providing investors with a better perspective of the stock market performance of the various segments of the Indian corporate sector, NSE has constructed various segment Indices such as the CNX MNC (Multinational Corporations) Index, CNX PSE (Public Sector Enterprises) Index and the CNX IBG (Indian Business Groups) Index. These indices aid investors in their asset allocation and segmental exposure decisions.
CNX Customized Indices
Customized indices can be used for tracking the performance of the clients portfolio of stocks vis-a-vis objectively defined benchmarks or for benchmarking funds’ NAV performance to customized indices.
Method of Computation of Indices 
The CNX Indices are computed using a market capitalization weighted method wherein the level of the Index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. 

Index Maintenance
The Index Maintenance Sub-committee of NSE ensures that the guidelines for index maintenance are adhered to, for example: -
Monitoring and completing divisor adjustments in a timely manner on account of corporate actions like share changes, stock splits, mergers/amalgamations, etc
Monitoring and updating the indices database dynamically
Index Review according to laid down criteria
Adjustments for corporate actions are carried out in a timely manner to ensure that the value of the index is not affected by the corporate action, and remains comparable over a period of time. Each index has a replacement pool comprising companies that meet all criteria for candidacy to that index. All replacements of companies in the index take place from this pool. The replacement pool is monitored continuously and at all times includes only those companies that meet the selection criteria. 

S&P CNX Nifty
It is the most popular index, which represents about 58% of the total market capitalization of NSE. 
The salient features of the S&P CNX Nifty are :
Companies eligible for inclusion in Nifty must have a six monthly average market capitalisation of Rs.500 crore or more during the last six months.
Companies eligible for inclusion in S&P CNX Nifty should have at least 12% floating stock. For this purpose, floating stock shall mean stocks which are not held by the promoters and associated entities (where identifiable) of such companies.
Liquidity; all selected stocks should be below a certain impact cost, which is defined in the next paragraph. The security should have traded at an average impact cost of 0.75% or less during the last six months for 90% of the observations (instead of the earlier criteria of 1.5% or less during the last one year for 85% of the observations).
Impact Cost Definition – The cost of executing a transaction in a security in proportion to the weight of its market capitalization against the index market capitalization at any point of time. 

Impact Cost Calculation - This is the percentage mark up suffered while buying or selling the desired quantity of a security compared to its ideal price 
(best buy + best sell) / 2, e.g. 
Bids and Offer at a particular time 

Buy (Qty.)Buy (Price)Sell (Qty.)Sell (Price)

To Buy 1500 Shares IDEAL PRICE = (99 + 98)/2 = 98.5
ACTUAL BUY PRICE = (1000 X 99 + 500 X 100)/1500 = 99.33
(FOR 1500 SHARES) IMPACT COST = (99.33 - 98.5)/98.5 X 100 = 0.84%

Base Date and Value
The base period selected for S&P CNX Nifty index is the close of prices on November 3, 1995, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000 and a base capital of Rs. 2.06 trillion.

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