How is Nifty Calculated?

METHODOLOGY OF INDEX CALCULATION

Introduction

The CNX Nifty is the flagship index on the National Stock Exchange of India Ltd. (NSE). The Index tracks the behavior of a portfolio of blue chip companies, the largest and most liquid Indian securities. It includes 50 of the approximately 1600 companies listed on the NSE, captures approximately 65% of its float-adjusted market capitalization and is a true reflection of the Indian stock market. The CNX Nifty covers 21 sectors of the Indian economy and offers investment managers exposure to the Indian market in one efficient portfolio. The Index has been trading since April 1996 and is well suited for benchmarking, index funds and index-based derivatives.The CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL). IISL is India’s first specialized company focused on an index as a core product.

Highlights

The CNX Nifty is a 50 stock, float-adjusted market-capitalization weighted index for India.It is used for a variety of purposes, such as benchmarking fund portfolios, index based derivatives and index funds.The CNX Nifty is derived from economic research and is created for those interested in investing and trading in Indian equities.

Market Representation.

The CNX Nifty stocks represent about 65% of the total float-adjusted market capitalization of the National Stock Exchange (NSE).

Diversification.

The CNX Nifty is a diversified index, accurately reflecting the overall market. The

reward-to-risk ratio of CNX Nifty is higher than other leading indices, offering similar returns but at lesser risk.

Liquidity.

Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the

costs faced when actually trading an index. For a stock to qualify for inclusion in the CNX Nifty, it has to reliably have market impact cost below 0.50 %, when doing CNX Nifty trades of Rupees (Rs) 2 crores.

Eligibility Criteria

Selection of the index set is based on the following criteria:

Liquidity (Impact Cost)

Float-Adjusted Market Capitalization

Float

Domicile

Eligible Securities

Other Variables

Liquidity.

For inclusion in the index, the security should have traded at an average impact cost of 0.50 %

or less during the last six months, for 90% of the observations. Impact cost is the cost of executing a transaction in a security in proportion to its index weight, measured

by market capitalization at any point in time. This is the percentage mark up suffered while buying/selling the desired quantity of a security compared to its ideal price -- (best buy + best sell)/2.

Float -Adjusted Market Capitalization.

Companies eligible for inclusion in the CNX Nifty must have at least twice the float-adjusted market capitalization of the current smallest index constituent.

Float.

Companies eligible for inclusion in the CNX Nifty should have at least 10% of its stock available

to investors (float). For this purpose, float is stocks which are not held by the promoters and associated entities (where identifiable) of such companies.

Eligible Securities.

All common shares listed on the NSE (which are of equity and not of a fixed income nature) are eligible for inclusion in the CNX Nifty index. Convertible stock, bonds, warrants, rights, and

preferred stock that provide a guaranteed fixed return are not eligible.

Other Variables

A company which comes out with an IPO is eligible for inclusion in the index if it fulfills the normal eligibility criteria for the index -- impact cost, float-adjusted market capitalization and

float -- for a three-month period instead of a six-month period.

Timing of Changes

The index is reviewed semi-annually, and a four-week notice is given to the market

before making any changes to the index constituents.

Additions

The complete list of eligible securities is compiled based on the float - adjusted market

capitalization criteria. After that, the liquidity (impact cost) and float - adjustment filters are applied to them, respectively. The top ranking companies form the replacement pool. The top stocks, in terms of size (float-adjusted market capitalization) are, then, identified for inclusion in the index from the replacement pool.

Deletions

Stocks may be deleted due to mergers, acquisitions or spin-offs. Otherwise, as noted above,

twice a year a new eligible stock list is drawn up to review against the current constituents. If this new list warrants changes in the existing constituent list, then the smallest existing constituents are dropped in favor of the new additions.

Index Construction

Approaches

The CNX Nifty is computed using a float-adjusted, market capitalization weighted methodology*,

wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The methodology also takes into account constituent changes in the index and corporate actions such as stock splits, rights issuance, etc., without affecting the index value.

* Beginning June 26, 2009, the CNX Nifty is being computed using float-adjusted market capitalization weighted method, wherein the

level of index reflects the float-adjusted market capitalization of all stocks in the Index.

Investible Weight Factors (IWFs)

Introduction

Free float methodology is globally regarded as an ideal methodology for calculation of equity indices. As per this methodology, free-float market capitalization of all index constituents is considered for calculation of the index. Free-float market capitalization of the index constituents is derived by applying IWFs on full market capitalization of respective companies in the index. This approach aims to limits the influence of a particular company in the index to the extent of its actual free float and reduces influence of large promoter/ strategic holding (which generally is not available for trading) on the index, thus making it truly investable.

Free float methodology in index calculation aids both active and passive investment strategies. Active managers are able to compare their portfolio return vis-à-vis the investable index and at the same time passive fund managers are able to offer low tracking error by introducing passive funds such as index funds, exchange traded funds linked to investable indices calculated based on free-float methodology.

IWF as the term suggests is a unit of floating stock expressed in terms of a number available for trading and which is not held by the entities having strategic interest in a company. Higher IWF suggest greater number of shares held by the investors as reported under public category within a shareholding pattern reported by each company.

The IWFs for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges on quarterly basis. The following categories are excluded from the free float factor where identifiable separately:

·         Shareholding of promoter and promoter group

·         Government holding in the capacity of strategic investor

·         Shares held by promoters through ADR/GDRs.

·         Strategic stakes by corporate bodies

·         Investments under FDI category

·         Equity held by associate/group companies (cross-holdings)

·         Employee Welfare Trusts

·         Shares under lock-in category

Eg. For XYZ Ltd.

	Shares	%
Total Shares	1,00,00,000	100.00

	Shares	%
Shareholding of promoter and promoter group	19,75,000	19.75
Government holding in the capacity of strategic investor	50,000	0.50
Shares held by promoters through ADR/GDRs.	2,50,000	2.50
Equity held by associate/group companies (cross-holdings)	12,575	0.13
Employee Welfare Trusts	1,45,987	1.46
Shares under lock-in category	14,78,500	14.79

IWF = [1,00,00,000 – (19,75,000 + 50,000 +2,50,000 +12,575 +1,45,987 +14,78,500)] / 1,00,00,000. =0.60870

Appendix

Price Index Calculations Formula

The CNX Nifty is computed using market capitalisation weighted method wherein the level of the Index reflects the total market value of all the stocks in the Index relative to the base period November 3,1995.The total market cap of a company or the market capitalisation is the product of market price and the total number of outstanding shares of the company.

Market Capitalization = Equity Capital * Price

Free Float Market Capitalization = Equity Capital * Price * IWF

Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)

Base market capital of the Index is the aggregate market capitalisation of each scrip in the Index during the base period. The market cap during the base period is equated to an Index value of 1000 known as the base Index value.