The ever-changing BSE-100 - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

The ever-changing BSE-100

Jul 12, 2003

Stock market indices are a measure of the general price movement of stocks listed on the stock exchange. This apart, stock market indices provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They are also used as an indicator for evaluating the performance of the overall economy. Keeping this in mind, the Bombay Stock Exchange (BSE) started compiling and publishing the BSE-Sensex index number of equity prices from 2nd January 1986. The base period for the index was 1978-79 and the base value was 100. The index number was calculated on the basis of the market capitalization of 30 stocks.However, with the passage of time, it was realized that the 30 stocks Sensex was too narrow and need for a wider index was felt. Consequently, BSE started compiling a more broad based index of 100 stocks namely, BSE-100 Index from 3rd January 1989. 1983-84 was taken as the base year on account of the price stability seen during that year. The 100 scrips were selected from the "specified" and " non-specified" list of 5 major stock exchanges, viz. Mumbai, Calcutta, Delhi, Ahmedabad and Madras.

The economy of every country is constantly evolving. Since, the index is an indicator of the direction in which the economy is moving, a change in the composition of the scrips in the index becomes inevitable. Moreover, increase in M&A activity has also necessitated changes in the index constituents. Taking the above into consideration, let us examine the changes made in BSE-100 in the last five years.

India is an emerging economy, which has seen many changes especially the emergence of the service sector in recent years. Moreover, there has also been an increase in the merger and acquisition front, which has resulted in a change in the index composition. An example in this regard is the removal of Reliance Petroleum from the BSE-100 in Oct '02, consequent to its merger with Reliance Industries. Since 1999, there have been as many as 90 changes in BSE-100. The criteria for selection of a scrip in the BSE-100 index, as mentioned on the BSE website, are market activity, due representation to various industry groups and representation of trading activity on major stock exchanges. But are so many changes in the index justified or is it that the changes are made on the basis of market sentiments? Has there been such a significant change in the economy, or have there been so many M&A deals happening that justify 90 changes in the past five years? Lets find out!

The index is an indicator of the direction in which the economy is moving. Yet, despite a marginal change in the contribution of various sectors to the GDP, there have been major changes in the index representing it. Thus, the logic that changes are made to take into account the changes happening in the economy is not justified. Moreover, very few of the changes can be attributed to M&A activity. A few prominent ones are the deletion of ICICI Ltd, Reliance Petroleum, Indo Gulf, and SmithKline Pharmaceuticals. Further, many of the scrips have been deleted due to a drop in the performance of the company. While no one can dispute the fact that the index should be regularly updated, frequent inclusions and deletions of scrips is a concern. For example, in case of Wockhardt, the scrip was included in Feb '99, removed in Jan '00 only to be included again in Oct '00.

Another thing that can be inferred on carefully studying the changes and the time when they are made is the fact that on many occasions, the selection of scrips seems to be influenced by market sentiments and the so called "in" sector. Thus, we find stocks like Aptech, Pentafour Software, Silverline Technologies, SSI and Visualsoft Technologies in the additions list at a time when the software sector was at its' prime (1999-2000). Most of these stocks were removed soon after the hype around them subsided. With PSU stocks (oil, banking and divestment hopefuls) currently enjoying the 'most happening sector' status, we observe that more than 25% (7 scrips) of the inclusions made in 2003 were PSU stocks.

BSE-100 v/s S&P Global-100 (Changes in index)
YearBSE-100S&P Global-100
Number of changes*Cumulative TotalNumber of changesCumulative Total
19993636NA**-
2000165244
200145659
2002763413
2003 (so far)2790417
source: BSE & S&P websites
* Click on the number to know the changes
** data not available

To get a global perspective, let us take a look at the frequency and rationale for changes in the S&P Global-100 index. Being a global index that selects companies from across the world, one would expect many changes in the index. However, actually, there have been only 17 changes in the index since 2000 (compared to 54 in BSE-100). The changes in S&P index are made only after taking into consideration the objective of ensuring high quality constituents with strong fundamentals and liquidity while keeping the 'index turnover as low as possible'. Futher, index additions are made only if a vacancy is created on account of an index deletion and subject to liquidity of the stock being included studied for atleast six months.

However, in case of BSE-100, it appears that as soon as a stock (or sector) comes into the limelight, it is included in the index at the cost of another scrip, which might have been included on the same logic, but which has now lost relevance. Thus, while the index committee does the right thing by replacing such scrips, the fact that they replace it with a similar weak stock is what warrants such drastic changes. Thus a never-ending cycle of additions and deletions is created. Although the index committee statistically ensures that the new index has a historic correlation with old one, how far has the index succeeded in fulfilling the very purpose for which it was established is anybody's guess?

The better thing, hence, would be to chose strong companies and stick with them even in bad times. By this, in the long run the BSE-100 will become an index representing India's 100 top companies and the investors too will get a clear message on the prospects of these companies.

Equitymaster requests your view! Post a comment on "The ever-changing BSE-100". Click here!

  

More Views on News

Stocks or Index: Which is Better for Trading? (Fast Profits Daily)

Oct 28, 2020

As a trader, which is better for you to trade, the benchmark indices or individual stocks? Find out in this video...

ESG Investing Is Gaining Preference Among Investors. Should You Invest? (Outside View)

Oct 28, 2020

ESG being a niche segment in the Indian mutual funds industry consists of only a handful of funds at present.

Why the Kotak Bank - IndusInd Bank Merger Should Interest You (Profit Hunter)

Oct 28, 2020

106%, 71%, 114% are the kind of returns banks have generated immediately after a virtuous merger.

The Real Upside in Kotak - IndusInd Bank Merger podcast (Views On News)

Oct 28, 2020

Why the proposed Kotak IndusInd merger has merit and urgency.

Important Update for Traders on the Rupee and Interest Rates (Fast Profits Daily)

Oct 27, 2020

Recently the USDINR and Indian bond yields have started to make important moves. In this video, I'll tell you why traders should be watchful.

More Views on News

Most Popular

My View on ITC (Fast Profits Daily)

Oct 23, 2020

What do the charts say about ITC?

Why ITC and not HUL is my Idea of a Good Investment Right Now Views On News (Views On News)

Oct 15, 2020

Rahul Shah discusses HUL's lost decade and its implications for ITC.

PSU Banks Will Move Up Again (Profit Hunter)

Oct 27, 2020

My charts tell me PSU banks are set for a rebound.

Why India's Drone Revolution is a 4x Profit Opportunity (Profit Hunter)

Oct 16, 2020

My research on India's leading defence companies brought me to one major player in drone manufacturing.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Oct 28, 2020 03:36 PM

MARKET STATS