August 24, 2007

life in financial markets: new nifty-sensex dynamic

"Everything is the same except the name", say the various sets of twins in the adverts for UTI Bank changing its name to Axis Bank. Watching news channels in the night or reading their newspapers next morning, many tend to say the same thing about the twin barometers of the country's stock market performance, Nifty and Sensex. But here, since the last four years, "nothing has been the same except the game." For some good reasons.

Its not that Nifty, or S&P CNX Nifty as is its formal name, is run by India Index Services & Products (IISL), a joint venture between National Stock Exchange and Crisil, and Sensex, or Sensitive Index as is its formal name, is run by the Bombay Stock Exchange. Both claim to be the best barometer of Indian stock market. Nor is it because Nifty is made up of 50 stocks and Sensex 30 stocks if we go by market analysts' claims that most portfolios having 20-25 diversified large cap stocks will return almost the same percentage profits or losses no matter what their composition.

Its because on September 1, 2003 the BSE changed the way it calculated Sensex from a market capitalisation-weighted index to a free float capitalisation-weighted index. IISL was continuing with the market cap-weighted approach for Nifty. Its time to take stock of how much impact has this change made in the movements of Sensex and Nifty when we co-relate them for the period leading uptil now and a similar period prior to the change.

New dynamic. The two graphs below tells us that the daily co-relation between the two indices didn't suffer greatly but it did result in their returns switching sides. From September 2003 to now is four years and the Sensex has returned 338.3% moving up from 4244 on August 29, 2003 to 14358 on August 17 this year. The Nifty, in this time, has returned 302.8% moving up from 1356 to 4108, and that is a difference of 25% in returns between the two. It was the reverse from September 1999 to August 2003. Sensex was down by 13.3% from 4898 to 4245 Nifty was down by a much smaller 3.9% from 1412 to 1357.

The cause... Due to its free float methodology Sensex is using a part of the total market capitalisation of its stocks. For instance, at August 17 closing prices, the current Sensex stocks had a combined total market capitalisation of Rs 18,61,500 crore but the BSE was using only Rs 9,35,600 crore of it as the free float part to calculate the Sensex.

An index value at any given point reflects the sum of market cap (total or free float as the case may be) of all the index stocks in relation to the corresponding market cap on a specified base date. If you start an index today with 10000 as the base value then if the sum of market cap of its stocks falls from say Rs 1,00,000 crore today to Rs 95,000 crore tomorrow then your index value tomorrow will be 9500. Of course, the base market cap has to be adjusted whenever there the share capital of a stock changes.

Based on quarterly disclosure by companies on its shareholding pattern, BSE's index committee decides which shareholding of Sensex companies are to be considered as promoter or having controlling interest in the company and then calculates the market cap for the remaining shareholding only. For instance, if it finds 61 per cent of Bharti Airtel's total market cap to be of such kind then after rounding it to 65 per cent it uses only 35 per cent of it.

Now, a 10 per cent rise in Bharti's share price will impact a full market cap-weighted index more than a free float-weighted index because the former uses 100 as the base and the latter only 35. As a result of such impacts, among the 29 stocks common to Sensex and Nifty, weights vary much more than they otherwise would based only due to additional 20 stocks in Nifty. See the table below.


Security Full market cap (Rs crore) used in Nifty1 % of full market cap used in Sensex
Weight in Nifty (%) 1
Weight in Sensex (%) 1
Reliance Industries 244254 50
ONGC 167409 20
Bharti Airtel 150728 35
NTPC 134401 15
Infosys Technologies 106094 85
TCS 103349 20
Reliance Communication 100891 35
ICICI Bank 91810 100
State Bank of India 79971 45
BHEL 76308 35
Wipro 69380 20
Larsen & Toubro 65512 90
ITC 57693 70
SAIL 56772

HDFC 51239 90
Reliance Petroleum 49140

Hindustan Unilever 42420 50
HDFC Bank 37741 80
Sterlite Industries 36608

Suzlon Energy 33856

Tata Steel 33167 70
Satyam Computer 29400 95
Grasim 25117 75
GAIL 25065

Tata Motors 24713 60
Bajaj Auto 22775 65
Maruti Udyog 22543 45
ABB 21714

Siemens 20061

HCL Tech 19940

Ambuja Cement 19269 65
Sun Pharma 18568

ACC 17853 60
Hindalco 17186 70
Reliance Energy 16442 70
National Aluminum 16092

M&M 15980 80
Punjab National Bank 15171

Cipla 14302 65
Tata Power 13879

Ranbaxy Laboratories 13099 70
Zee Entertainment 12654

Hero Honda 12454

BPCL 11117

VSNL 10552

IPCL 10525

Dr Reddys 10506 75
Glaxosmithkline 9512

Dabur 8587

MTNL 8426

HPCL 7643

1 - based on Aug 17 closing price

..and the ongoing debate.
The Nifty and the Sensex do not just serve as colourful indicators of market movement but investors in index funds and exchange traded funds (ETFs) actually make or lose money based on their movement. There are around 18 index funds of which around 12 are based on Nifty and the rest on Sensex. ETFs on indices are only four – one each on Nifty, Sensex, Junior Nifty and CNX Bank. See the table below.

Index Funds:


Franklin Templeton



Birla MF

Canbank MF


Principal PNB

Reliance MF


Tata MF


Junior Nifty CNX Bank

ICICI Prudential


These funds have to mimic the index movements and keep their tracking errors low. They also have to keep their transaction costs the lowest in the industry. I asked an ETF manager in the country he said "We think the index should reflect whatever is there in the market and thats why the market-cap weighted indices choice for our ETFs. If the market thinks the free float of a company is very low there will be a illiquidity premium on it, so we are saying that let the market define that and let us not impose a number on it through a free float factor."

I sought the views of an independent scholar and he said "There is a certain body of economic theory, however good or bad, that accepts that only the market cap-weighted index gives the best Sharpe ratio." Sharpe's ratio gives the excess return (actual minus risk-free rate) on an investment for the extra volatility endured in holding the investment. "There is no comparable theory for free float-weighted index", he added. The BSE, on the other hand, claims on its website that "an index based on free float is more accurate and indicative of the actual trend."

Whether leaving out promoters holding, the crux of the matter, is good or not continues to get hotly debated across markets in the world. The independent scholar I spoke had this to day: "Is the promoter holding fixed? Not really. They transact. They respond to prices like you and me. He is a part of the normal market process. I am uncomfortable with this thing of the promoters being "up and there" that he is somehow external where the rest of us are in."

Even in the United States the popular Dow Jones index is not a full market cap index – its a evenly-weighted index where all stocks are assigned the same weight regardless of the size of the market cap. But the other popular index—S&P 500—is on total market cap method and is the one that majority of index funds and ETFs deployed in the US.

So, as an investor in an index fund or ETF, you might want to form your own opinion before you decided between a Nifty-based or a Sensex-based one.

August 14, 2007

life in journalism: attack by shiv sena goons on outlook's editorial office in bombay

At 3 pm today (as I write this it is 4.45 pm) 8-9 hefty goons from the Shiv Sena attacked the editorial office of Outlook magazine at the 10th floor of Raheja Chambers in Nariman Point in south Bombay. They broke glass panes, fax machine, photocopier and other office stuff. Fortunately, no person was attacked.

These political thugs were protesting a statement in Outlook's current Independence Day special issue calling Bal Thackeray a villain.

I was in Outlook till last month and worked in this very office. Its a small office where only journalists of Outlook, Outlook Money, Outlook Business and Marie Claire (with whom Outlook has a partnership) work. Another office--a much bigger one--where non-editorial personnel sit is near Bandra-Kurla Complex.

Outlook's journalists tend to work from home most days and that was also how it was today. Fortunately. Otherwise the goons might have targetted them. The first thing they did when they barged in the office was to ask for the editor of Outlook and were told that there was no senior person from Outlook around. When I was in Outlook I used to work from office at least three days a week and any visitor for Outlook used to be directed to me if none of my Outlook colleagues were around. So had I been there in Outlook and had I been working from office on this day I could have been targetted.

Its a sad day for journalism in India. My ex-colleagues from Outlook Money and Outlook Business, were present in office, have been shaken by the experience. But it should also make us journalists and particularly editors realise what we do when we look the other way by not covering attacks on NGOs and social activists like Medha Patkar who are also subject to similar violence by right-wing, communist and centrist goons every now and then.

August 11, 2007

life in general: handcuffed boy in midnight local train

This Wednesday, I was returning home from work at 11.45 pm by the local suburban train and I saw in the compartment a young boy standing with his right hand handcuffed to the left hand of a man. See the 2 photos alongside which I took from my mobile phone with great difficulty without letting anyone around know (thats also the reason why the photos are not crystal clear, i just couldn't aim my cameraphone openly and click). The young boy is dark blue shirt and the man is grey shirt. The man had two accomplices who are not seen in the photos.

I don't know what exactly we can deduce but any of atleast two things are possible:
- the man and his 2 accomplices are cops in plain clothes and they are taking that young boy to some police station
- they are cops but are, god forbid, taking that boy to bump him off in a fake encounter case.

August 05, 2007

life in general: medha patkar's arrest & dangerous lack of justice

Even though I am a journalist (a financial one though), as a citizen I still write to 'letters to editor' columns of newspapers on non-financial issues occasionally.

This Thursday (August 2) was one such occasion when I emailed 8-9 newspapers my views on the arrest of Medha Patkar and the dangerous lack of justice in our country. I share it below. The update on the issue is that Medha Patkar was released yesterday.

Here then is the 'letter to editor':

Dear Editor,

Medha Patkar was arrested on Wednesday last week (July 25) near Barwani in

Madhya Pradesh along with her Narmada Bachao Andolan colleagues and scores of
Adivasi villagers who were staging a dharna for rehabilitation rights.

She has not been released yet. Is this a shining India or a dictatorial ugly
India? Minor technical violations of the law by strong personalities who demand
rights for the disfavoured people in the country, are acted upon by the
government with swift brute force whereas stronger violations by politicians,
religious fanatics and industrialists are not even considered for action.

Many media publications and TV channels, too, have become cowardly in their
coverage of the issues facing rural communities and wherever there is coverage
it is against the rights of the people and plugging on behalf of industry and
an industry-influenced government. I urge you to do justice to the profession
of journalism and ask questions to the Madhya Pradesh government and state
police as to why they have kept Medha Patkar arrested for more than a week for
minor violations.

I also exhort you to raise questions about the violations by the central
government of India and the state governments of MP, Gujarat and Maharashtra of
the 2000 Supreme Court judgement on the Narmada issue which clearly stated that
the Sardar Sarovar Dam height should not be raised unless the affected
villagers are given alternative equally-fertile lands and rehabilitation. And
this has not happened in more than 80-90% of the cases in all these years and
yet the dam height is being raised continuously.

The media should also seriously investigate the dangerous damage being cause to
the ecology and environment by Narmada Dam and various other so-called
development projects in the country. A cost-benefit analysis should be made
without getting influenced by governmental and industry bodies’ claims and
without being pressurised by threats of advertisement withdrawals. Government
and industry needs the media to advertise their programs and activities as much
as the media needs them for ad revenues. So, you don’t have to buckle under
their pressure.

August 04, 2007

life in general: pups wagging their tails in joy!

There were two small pups staying around my residential apartment four years back. I used to feed them, play with them, make the little children of my apartment play with them, and generally enjoy their company.

I took a video of them on September 8, 2003. I have managed to upload it on youtube today. The voice/funny sounds being made in the background in the video is mine!

Alongside is also a pic of them.