BSE SENSEX

• What is the BSE SENSEX?
• What are the objectives of BSE SENSEX?
• What are the criteria for selection and review of Securities for the BSE SENSEX ? What is the beta of BSE SENSEX Securities?
• What is the beta of BSE SENSEX Securities?
• How is BSE SENSEX Computed?
• With what frequency is BSE SENSEX calculation done?
• Who maintains the index?

1. What is the BSE SENSEX?

BSE SENSEX or Sensitive Index is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, BSE SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of BSE SENSEX is 1978-79 and the base value is100. The index is widely reported in both domestic and international markets through print as well as electronic media.

The index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, and Dow Jones use the Free-float methodology.

Due to is wide acceptance amongst the investors; BSE SENSEX is regarded to be the pulse of the Indian stock market . As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the BSE SENSEX has over the years become one of the most prominent brands in the Country.



2. What are the objectives of BSE SENSEX?

The BSE SENSEX is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors and fund managers. The objectives of the index are:

• To measure Market Movements
Given its long history and its wide acceptance, no other index matches the BSE SENSEX in reflecting market movements and sentiments. BSE SENSEX is widely used to describe the mood in the Indian Stock markets.
• Benchmark for Funds Performance
The inclusion of Blue chip companies and the wide and balanced industry representation in the BSE SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.
• For Index Based Derivatives Products
Institutional investors, money managers and small investors all refer to the BSE SENSEX for their specific purposes The BSE SENSEX is in effect the proxy for the Indian stock markets. Since BSE SENSEX comprises of leading companies in all the significant sectors in the economy, we believe that it will be the most liquid contract in the Indian market and will garner a pre-dominant market share.

3. What are the criteria for selection and review of Securities for the BSE SENSEX ?

Criteria for Selection and Review of BSE SENSEX Constituents

The Security selection and review policy for BSE SENSEX is based on the objective of:

• Transparency
• Simplicity

Index Review Frequency : The Index Committee meets every quarter to review all the BSE indices including BSE SENSEX. However, every review meeting need not necessarily result in a change in the index constituents. In case of a revision in the Index constituents, the announcement of the incoming and outgoing Securities is made six weeks in advance of the actual implementation of the replacements in the Index, in accordance with SEBI requirements.

Qualification Criteria: The general guidelines for selection of constituent Securities in BSE SENSEX are as follows:

Eligible Universe : The index is derived from the constituents of the BSE 100. The inclusion of DVRs in the index will result in more than 30 stocks in the index. However, the number of companies in the index remains fixed at 30. Stocks in the eligible universe must satisfy the following eligibility factors in order to be considered for index inclusion:

• Listing History: Stocks must have a listing history of at least six months at BSE.
• Trading Days: The stock must have traded on every trading day at BSE during the six-month reference period.
• Derivative Linkage: Stock must have a derivative contract.
• Multiple Share Classes: DVRs satisfying the above eligibility criteria are aggregated with the company’s common stock and index construction is done based on the aggregated company data as detailed below.

Index Construction:

• All companies meeting the eligibility factors are ranked based on their average six-month float-adjusted market capitalization. The top 75 are identified.
• All companies meeting the eligibility factors are ranked again based on their average six-month total market capitalization. The top 75 are identified.
• All companies identified based on steps 1 and 2 are then combined and sorted based on their annualized traded value. Companies with a cumulative annualized traded value greater than 98% are excluded.
• The remaining companies are then sorted by average six-month float-adjusted market capitalization. Companies with a weight of less than 0.5% are excluded.
• The remaining companies from step 4 are then ranked based on their average six-month float-adjusted market capitalization, and are selected for index inclusion according to the following rules:
  • The top 21 companies (whether a current index constituent or not) are selected for index inclusion with no sector consideration.
  • Existing constituents ranked 22 – 39 are selected in order of highest rank until the target constituent count of 30 is reached.
  • If after this step the target constituent count is not achieved, then non-constituents ranked 22 – 30 are selected by giving preference to those companies whose common India Industry Classification Structure macro-economic indicator is underrepresented in the index as compared to the macro-economic indicator representation in the BSE AllCap.
  • If after this step, the target constituent count is still not achieved, non-constituents are selected in order of highest rank until the target constituent count is reached.

Annualized traded value is calculated by taking the median of the monthly medians of the daily traded values over the six-month period. The annualization is calculated using 250 trading days in a year.

All additions and deletions are made at the discretion of index committee.

Constituent Weightings: Index constituents are weighted based on their float-adjusted market capitalization.

4. What is the beta of BSE SENSEX Securities ?

Beta measures the sensitivity of a Securities Price movement relative to movement in the BSE SENSEX. Statistically Beta is defined as: Beta = Covariance ( BSE SENSEX, Stock)/ Variance ( BSE SENSEX).

Note : Covariance and variance are calculated from the Daily Returns data of the BSE SENSEX and BSE SENSEX Securities.


5. How is BSE SENSEX computed ?

BSE SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.


F & O Segment

The base period of BSE SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of BSE SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the BSE SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of Securities etc. During market hours, prices of the index Securities, at which latest trades are executed, are used by the trading system to calculate BSE SENSEX every second and disseminated in real time.


6. With what frequency is BSE SENSEX calculation done ?

During market hours, prices of the index Securities, at which trades are executed, are automatically used by the trading computer to calculate the BSE SENSEX every second and continuously updated on all trading workstations connected to the BSE trading computer in real time. A day's opening, high and low prices are also given by the computer. But the closing prices are calculated using spreadsheet to ensure theoretical consistency.


7. Who maintains the index ?

One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like bonus etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values.

Asia Index Private Ltd. (AIPL) which is a wholly owned subsidiary of BSE Ltd. does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee. AIPL ensures that BSE SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity.