The revamped BSE Sensex - A volatile bias

In a widely anticipated move the Bombay Stock Exchange (BSE) has revamped the Sensitive Index (BSE Sensex) (effective 10th April 2000). Among the new entrants are three so-called 'new economy' (knowledge driven) stocks - Dr Reddy's, Zee Telefilms and Satyam Computers. The fourth, Reliance Petroleum is a refining company (a capital-intensive business) that accounts for approximately 25% of India's refining capacity. The authorities, it seems, have taken care to ensure that a broad mix of companies are inducted into the Sensex.

On the way out of the Sensex are four companies (therefore the Sensex continues to be based on 30 companies), two of which were the sole representatives of their respective sectors in the index - Tata Chemicals (chemicals and fertilisers) and Indian Hotels (hotels). The other two companies on whom the axe has fallen are Tata Power (power) and Industrial Development Bank of India (IDBI) (financial institutions). Have the authorities been successful in their attempt to make the Sensex more representative of the stock market?

Well, in a way yes. As compared to Rs 2.8 trillion for the current Sensex, the new Sensex will command a market capitalisation (m cap) of Rs 3.8 trillion. In percentage terms, the existing Sensex is 29% the total size (m cap) of the BSE; the new Sensex will be 39% of the BSE. Therefore the aim of the authorities seems to have been achieved. But at what cost?

According to our sector classifications, the BSE Sensex will now represent only 18 sectors, as compared to 19 earlier, which in any case was a narrow base. The authorities it seems have come the conclusion that hotels and chemicals & fertilisers no longer play an important role in the economy. The new sector is media, which will enjoy a weightage that is 4.8 times that of the automobile sector (considered by many to be the barometer of economic activity).

A glance through the sector weightages, pre and post the revamp, reveals that energy sources and media are the two sectors that have gained the most. Infact the software sector has gained an insignificant 1%, while pharmaceuticals have actually witnessed a decline. All other sectors have witnessed a decline in weightage (largely in favour of the media sector).

The aim it seems has been to include the most highly traded stocks into the Sensex. Satyam Computers, Zee Telefilms and Reliance Petroleum are usually among the most heavily traded stocks in the market. Infact, three of the four stocks (excluding Zee Telefilms) that have been added to the Sensex already form a part of the NSE Nifty Index, an index computed by the National Stock Exchange (NSE), its arch rival.

Whether the constituents in the Sensex should be reflective of only stock market activity or economic activity (if both, then the combination would be ideal) is an ongoing debate. The authorities have constrained themselves to just 30 stocks and this is hindering a broader sectoral representation. In the meantime, the Sensex is now biased towards the more volatile software and media stocks (combined weightage of 42.9% in the Sensex). The new Sensex, it would not be incorrect to say, is a vote in favour of volatility. Brace yourself for a roller coaster ride!