Maintenance of Indices

Maintenance of Indices

Maintenance of indices

Mere one-time creation of the index is not sufficient. It requires an on-going maintenance to keep the index up-to-date to most recent developments. The maintenance of the indices requires twofold approach. Firstly keeping track of the developments in the existing index constituents and giving appropriate effect for index computation and secondly reviewing the composition of indices on a periodic basis and make necessary scrip replacements in the indices based on the applicable eligibility criteria.

As a matter of fact, the index value must change only on account of change in the stock price of index constituents. At no point in time, value of index can move on account of change in the index composition, equity, IWF or any other corporate actions (rights, bonus, stock split etc.). At every instance of such events, corresponding adjustment to equity shares, stock price and divisor needs to be made to ensure that the continuity of the index post adjustment is maintained.

We will discuss the first part of index maintenance that includes keeping track of the developments in the existing index constituents. In fact, all companies listed on NSE are tracked on a daily basis for the events as explained hereunder.

To illustrate each of the events, let us have one sample index composition.

Day 1
Day 25

Base composition

Company	Shares outstanding	IWF	Price	Full Mcap*	FF Mcap*
ABC LTD.	10000	1.00	200	2000000	2000000
BCD LTD.	20000	0.80	300	6000000	4800000
CDE LTD.	30000	0.75	400	12000000	9000000
DEF LTD.	40000	0.40	500	20000000	8000000
EFG LTD.	50000	0.25	600	30000000	7500000
Total				70000000	31300000
Index Divisor				31300000
Base Index Value				1000.00 *

Company	Shares outstanding	IWF	Price	Full Mcap*	FF Mcap*
ABC LTD.	10000	1.00	250	2500000	2500000
BCD LTD.	20000	0.80	350	7000000	5600000
CDE LTD.	30000	0.75	425	12750000	9562500
DEF LTD.	40000	0.40	450	18000000	7200000
EFG LTD.	50000	0.25	610	30500000	7625000
Total					32487500
Index Divisor				31300000
Base Index Value				1037.94 *

Change in equity

Issuance of bonus shares

Change in the face value of equity shares (Stock split):

Consolidation of face value (reverse stock split):

Issuance of shares on rights basis

In order to support the business expansion plans, companies are required to raise the finance. The finance is raised through multiple ways such as raising a long-term loan from the market for which company needs to pay the interest charges. Instead, company can raise long term finance by way of issuance of equity shares through further public offering (FPO) or issuing shares to the existing shareholders at a discount to the market price on a rights basis. Issuance of shares to the existing shareholders on a rights basis provides an incentive to the equity shareholder if a company’s fundamental are strong and rights is provided at a discount to the market price of a share.

In case of a rights issue of equity shares, shares considered for index computation would be increased proportionately and stock price would be calculated considering the rights proportion and issue price for computation of the market capitalization of the index constituents. As shareholder pays consideration for exercising the rights shares, there would be an increase in the company’s market capitalization and such change will necessitate adjustment to the index divisor in case index is calculated based on mcap method (full or free-float). Adjustment of rights shares is made to be effective from the ex. rights date. In case, rights issue is undersubscribed, reconciliation entry is made upon receipt of corresponding information from the listing department of NSE.

Day 25

Base composition

Company	Shares outstanding (a)	IWF (b)	Price (c)	Full Mcap (d) (a * c)	FF Mcap * (abc) (e)
ABC LTD.	10000	1.00	250	2500000	2500000
BCD LTD.	30000	0.80	350	9600000	7680000
CDE LTD.	30000	0.75	425	12750000	9562500
DEF LTD.	40000	0.40	450	18000000	7200000
EFG LTD.	50000	0.25	610	30500000	7625000
Total					34567500
Index Divisor					33303971
Index				1037.94*

Special dividend

Merger/ Amalgamation

Demerger/ split

Calculation and dissemination of indices

IISL calculates more than 100 indices on a daily basis; of which as many as 29 indices are computed on-line and rest indices are computed on end-of-day basis. Nifty is calculated on per trade basis disseminated on per second basis along with other indices.