FAQ's on Sensexs

...Closing Rates...

FAQ's on Sensexs

1 What is BSE-SENSEX?

2 What are the objectives of BSE-SENSEX?

3 What are the criteria for selection and review of scrips for the BSE-SENSEX?

4 When is the frequency and details of replacements in BSE-SENSEX?

5 What companies are part of BSE- SENSEX currently?

6 What is the beta of SENSEX scrips?

7 How is BSE-SENSEX calculated?

8 How is the closing Index calculated?

9 How is the routine maintenance of BSE SENSEX carried out?

10 How are adjustments for Bonus, Rights and newly issued Capital carried out in BSE-SENSEX?

11 With what frequency is SENSEX calculation done?

Q.1 What is BSE-SENSEX?
BSE-SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors. The index is widely used to measure the performance of the Indian stock markets. BSE-SENSEX is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks at The Stock Exchange, Mumbai. Further, as the oldest index of the Indian Stock market, it provides time series data over a fairly long period of time (since 1978-79). Over the years, BSE-SENSEX has become one of the most prominent brands in the country.

Q.2 What are the objectives of BSE-SENSEX?
The BSE-SENSEX is the benchmark index of the Indian Capital Markets 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. 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 SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.

For index based derivative 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. The country's first derivative product i.e. Index-Futures was launched on BSE-SENSEX.

Q.3 What are the criteria for selection and review of scrips for the BSE-SENSEX?
A. Quantitative Criteria:
1. Market Capitalization:
The scrip should figure in the top 100 companies listed by market capitalization. Also market capitalization of each scrip should be more than 0.5 % of the total market capitalization of the Index i.e. the minimum weight should be 0.5 %. Since the BSE SENSEX is a market capitalization weighted index, this is one of the primary criteria for scrip selection. (Market Capitalization would be averaged for last six months)
2. Liquidity:
(i) Trading Frequency: The scrip should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like scrip suspension etc. (ii) Number of Trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year. (iii) Value of Shares Traded: The scrip should be among the top 150 companies listed by average value of shares traded per day for the last one year. (iv) Trading Activity: The average number of shares traded per day as a percentage of the total number of outstanding shares of the company should be greater than 0.05 % for the last one year.
3. Continuity:
Whenever the composition of the index is changed, the continuity of historical series of index values is re-established by correlating the value of the revised index to the old index (index before revision). The back calculation over the last one-year period is carried out and correlation of the revised index to the old index should not be less than 0.98. This ensures that the historical continuity of the index is maintained.
4. Industry Representation:
Scrip selection would take into account a balanced representation of the listed companies in the universe of BSE. The index companies should be leaders in their industry group.
5. Listed History:
The scrip should have a listing history of at least six months on BSE.
B. Qualitative Criteria:
1. Scrip Group: The scrip should preferably be from 'A' group.
2. Track Record:
The company should preferably have a continuous dividend paying record or /and promoted by management having proven record.

Q.4 When is the frequency and details of replacements in BSE-SENSEX?

Date	Outgoing Scrips	Replaced by
01.01.1986	Bombay Burmah	Voltas
	Asian Cables	Peico
	Crompton Greaves	Premier Auto.
	Scinda	G.E.Shipping

03.08.1992	Zenith Ltd.	Bharat Forge

19.08.1996	Ballarpur Inds.	Arvind Mills
	Bharat Forge	Bajaj Auto
	Bombay Dyeing	BHEL
	Ceat Tyres	BSES
	Century Text.	Colgate
	GSFC	Guj. Amb. Cement
	Hind. Motors	HPCL
	Indian Organic	ICICI
	Indian Rayon	IDBI
	Kirloskar Cummins	IPCL
	Mukand Iron	MTNL
	Phlips	Ranbaxy Lab.
	Premier Auto	State Bank of India
	Siemens	Steel Authority of India
	Voltas	Tata Chem

16.11.1998	Arvind Mills	Castrol
	G. E. Shipping	Infosys Technologies
	IPCL	NIIT Ltd.
	Steel Authority of India	Novartis

10.04.2000	I.D.B.I	Dr. Reddy’s Laboratories
	Indian Hotels	Reliance Petroleum
	Tata Chem	Satyam Computers
	Tata Power	Zee Telefilms

08.01.2001	Novartis	Cipla Ltd.

07.01.2002	NIIT Ltd.	HCL Technologies Ltd
	Mahindra & Mahindra	Hero Honda Ltd.

Q.5 What companies are part of BSE- SENSEX currently?

BSE-SENSEX SCRIPS AND THEIR WEIGHT IN INDEX AS ON JANUARY 8, 2002

Sr. No.	Name	Market Capitalization (Rs.cr.)	Weight in Index (%)
1	HIND.LEVER LTD.	48361.33	17.79
2	RELIANCE IND.	33398.85	12.28
3	INFOSYS TECH.	31922.23	11.74
4	ITC LTD.	17590.11	6.47
5	REL.PETROL.	14590.68	5.37
6	SATYAM COMP.	10335.78	3.80
7	STATE BANK	10161.07	3.74
8	HCL TECHNOLOGIES	9050.96	3.33
9	RANBAXY LAB.	8298.12	3.05
10	MTNL	7994.70	2.94
11	DR.REDDY'S LAB.	7460.40	2.74
12	CIPLA	6996.67	2.57
13	HERO HONDA	5835.87	2.15
14	ZEE TELEFILMS	5300.69	1.95
15	HINDALCO	5212.25	1.92
16	NESTLE	4868.99	1.79
17	L&T	4812.05	1.77
18	HPCL	4670.88	1.72
19	BAJAJ AUTO	4039.25	1.49
20	TISCO	3637.43	1.34
21	ICICI	3502.64	1.29
22	BHEL	3381.36	1.24
23	GUJ.AMB.CEMENT	3205.87	1.18
24	A.C.C.	2853.94	1.05
25	BSES LTD.	2788.44	1.03
26	GRASIM IND.	2630.92	0.97
27	TELCO	2547.05	0.94
28	CASTROL	2367.24	0.87
29	COLGATE PALM.	2292.16	0.84
30	GLAXO LTD	1783.98	0.66

Q.6 What is the beta of SENSEX scrips?
Beta measures the sensitivity of a scrip movement relative to movement in the benchmark index i.e. BSE-SENSEX. A Beta of one means that for every change of 1% in index, the scrip moves by 1%. Statistically Beta is defined as: Covariance (SENSEX, Stock )/ Variance(SENSEX)
Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX and SENSEX scrips

Q.7 How is BSE-SENSEX calculated?
SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this methodology, the level of index at any point of time reflects the total market value of 30 component stocks relative to a base period. (The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company). Statisticians call an index of a set of combined variables (such as price and number of shares) a composite index. A single indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time. It is much easier to graph a chart based on indexed values than one based on actual values.

The base period of SENSEX is 1978-79. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 100. This is often indicated by the notation 1978-79=100. The formula used to calculate the Index is fairly straightforward. However, the calculation of the adjustments to the Index (commonly called Index maintenance) is more complex.

The calculation of SENSEX involves dividing the total 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 SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index maintenance adjustments. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated, all-over the country through BOLT terminals in real time.

Q.8 How is the closing Index calculated?
The closing SENSEX is computed taking the weighted average of all the trades on SENSEX constituents in the last 15 minutes of trading session. If a SENSEX constituent has not traded in the last 15 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for computation of Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.

Q.9 How is the routine maintenance of BSE SENSEX carried out?
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 additional issue of capital and other corporate announcements like bonus etc. do not destroy the 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.
The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee. The Index Cell takes special care to ensure that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between high turnover in Index scrips and its representative character. The Index Committee of the Exchange has experts from different field of finance related to the capital markets. They include Academicians, Fund-managers from leading Mutual Funds, Finance - Journalists, Market Participants, Independent Governing Board members, and Exchange administration.

Q.10 How are adjustments for Bonus, Rights and newly issued Capital carried out in BSE-SENSEX?

The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the Index Cell of the Exchange, the base value is adjusted, which is used to deflate market capitalization of the component stocks to arrive at the SENSEX value.

The Index Cell of the Exchange keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 13 Indices.

· Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the market capitalisation of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market Capitalisation (see ' Base Market Capitalisation Adjustment' below).

· Adjustments for Bonus Issue:
When a company, included in the compilation of the index, issues bonus shares, the market capitalisation of that company does not undergo any change. Therefore, there is no change in the Base Market Capitalisation, only the 'number of shares' in the formula is updated.

· Other Issues: Base Market Capitalisation Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.

· Base Market Capitalisation Adjustment: The formula for adjusting the Base Market Capitalisation is as follows:

New Base Market Capitalisation	=	Old Base Market Capitalisation	X	New Market Capitalisation -------------------------------------------
				Old Market Capitalisation

· To illustrate, suppose a company issues right shares which increases the market capitalisation of the shares of that company by say, Rs.100 crores. The existing Base Market Capitalisation (Old Base Market Capitalisation), say, is Rs.2450 crores and the aggregate market capitalisation of all the shares included in the index before the right issue is made is, say Rs.4781 crores. The "New Base Market Capitalisation " will then be:

Rs.2501.24 crores	=	2450	X	(4781+100) ---------------------
				4781

· This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index number from then onwards till the next base change becomes necessary.

Q.11 With what frequency is SENSEX calculation done?
During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time

Cochin Stock Exchange, Kochi, India