It has been a sheer unleashing of raw energy. At the beginning of the new millennium, not many would have contemplated that the Sensex would speed up to these levels and become a cynosure for all equity investors across the globe. Certainly not those 300 odd people who contributed a rupee each in 1875 to constitute, what is now known as ‘The Stock Exchange, Mumbai’, or the BSE. The Sensex now forms a part of fund manager’s plans all over the world and in many ways has become the barometer for economic wellness in India. So when the Sensex jumps, so does the business community and when it tanks, there’s gloom around. No wonder it is called the sensitive index.
The Sensex has become a part of the sensitivities thanks to the euphoria caused by the race to the 20k mark. The Sensex has accelerated more than three times in a matter of three and half years. In 2004, the Sensex was hovering at around 5,000 point levels. Interestingly, it had taken 25 years to reach 5,000 points from the base of 100 in 1978-79.
Systems propel
The ride from the scratch to 5,000 points was not easy because there was no system of dematerialisation and liquidity was low. Even the constituents of the Sensex remained in the Sensex for a long time and did not build in the sensitivity, reckon experts. And this can be seen from the fact that in the decade after the Sensex was constituted in 1986, there were only five companies that made their way out of the premier index. It was the year 1996 that marked a complete makeover of the Sensex, where around half of the constituents were replaced with the ones that were more representative of the market.
The Sensex is more dynamic now and there are specific criteria to select a company to be a part of the Sensex. Due to the various entry and exit of companies, new and emerging sectors became a part of the Sensex. Sectors like automobiles, IT, and telecom being the ones. Currently, the index consists of 12 sectors and these all are significant sectors contributing to the GDP growth.
The sectors include power, information technology, health care, auto, cement, telecom, FMCG, capital goods, oil & gas, finance, metals, and diversified ones. The Sensex is designed in such a fashion that the top 30 companies are the largest in their respective sectors and that sector is very significant for the economy to grow. To be a part of the Sensex, the company should have a listing history and have frequently traded for at least three months at BSE. Otherwise it should rank in the top 10 companies having the highest market cap in the BSE universe. There are some more criteria like the company should figure in the top 100 companies listed by final rank. The final rank is based on 75% weightage given to a three-month average full market cap and remaining 25% to a three-month average daily turnover and impact cost. Also, the company should represent the industry. And lastly the company should have an acceptable track record.
Apart from replacement in the stocks, there has been a change in the methodology. The Sensex was following a weighted average market capitalisation (Market cap) methodology. Market cap is the number of shares multiplied by market price. The ones who have the highest market cap will be given higher weightage and vice-versa. This methodology has changed to free-float (FF) market cap.
New avenues
Free float means the numbers of shares outstanding other than the promoters’ stake and lock-in shares. So, the higher the non-promoters’ stake, higher will be the free-float. For instance, ICICI bank free-float market cap is the same as full market cap, since there is no promoter’s stake in the bank. The reason behind implementing the free-float was to drive home an important point.
It emphasised that higher the free-float percentage, lesser will be the possibility of manipulations by the kingpins of the company-the promoters – in the market. One must also consider that lesser the number of shares in the market implies lesser liquidity and will lead to higher price and ultimately higher market capitalisation.
So the companies, which have less free-float, are given less weightage and they will also have lesser influence on the index. This system changed the weightage significantly, as stocks like ONGC, in which the holding of the government is 75%, will have less influence than ICICI bank, where 100% of the shares are free-float. It must be noted that the free float factor changes when there is an addition in the number of shares. The weightage changes when any company dilutes its equity by preferential allotment, ESOPs, warrants or rights issue. One more thing to note here is there are 18 companies in the Sensex that have remained unchanged since 2001. Also nine companies have been replaced (see the table).
Over the years, as the stocks kept changing, there were certain new sectors, which were in the index. The sectors, which came in were information technology, automobiles and telecom. The sectors which lost their sheen were oil & gas and healthcare, in terms of weightage in the index. The free float factors began from November 10, 2003
The future path
Over the years you have seen some new sectors emerging as growth drivers, like telecom. But, now, it is the real estate sector, which will enter the Sensex in November with DLF. With this entry, Dr Reddy Laboratories will get replaced. Currently, DLF commands a market capitalisation of Rs 1,55,000 crore and a free float of Rs 23,000 crore.
It must be noted that there is a huge difference in the free-float and full market cap. This will lead to a comparably lower weightage to DLF in the Sensex. Obviously, DLF’s entry in the Sensex will lead to a higher market cap for the Sensex. Looking at the way the Sensex is moving, it wont be a surprise if it touches the 25,000 points-mark. But the ride will not be simple. It will be a bumpy and volatile ride. But it would be a historic one.
