The National Stock Exchange of India (NSE) and the BSE took an important decision recently on the ‘India Industry Classification’ structure for listed companies. The four-level industry classification structure comprises 12 macro economic sectors, 22 sectors, 58 industries and 200 basic industries. 

The classification will come into effect from March 31, the bourses said in a statement and adding that a detailed guideline governing the industry classification structure and categorisation of companies listed and traded at NSE and BSE can be accessed on the respective websites. Introduction of the new Industry Classification structure jointly by NSE and BSE is expected to bring in a harmonised approach, while categorising companies into different sectors and should be uniformly used by all capital market intermediaries, the statement from the exchanges further said.

Global indices

A standard industry classification is not new to global markets. S&P-500 and Morgan Stanley Capital International joined together to launch Global Industry Classification Standard (GICS) in 1999. FTSE, in collaboration with Dow Jones in 2005, launched Industry Classification Benchmark (ICB), which is widely used by the bourses across the world including Nasdaq, NYSE, and STOXX. Over 25,000 securities across the globe are categorised under four tiers. ICB divides them into 10 industries, 18 super-sectors, 39 sectors and 104 sub-sectors. GICS classifies all securities under 11 economic sectors that are further divided into 24 industry groups, 68 industries, and finally into 157 sub-industries categories.

Why it is necessary

There is no such standardisation when it comes to classification of Indian companies by the BSE and the NSE. Today, the BSE has 123 Industry/Sector classifications to capture all listed companies; while the NSE has about 25 sectoral/thematic indices broadly capturing most of the listed stocks on the bourse. Adoption of a common classification by BSE/NSE will help the investment community that seeks to go beyond the index constituents and assess a company’s financial performance.

Surprisingly, even in the case of a company like Infosys which can be simply identified, there are classification differences. The BSE has classified it as IT Consulting & Software and the NSE as Computer-Software. The classification is more bizarre for index heavyweight and diversified conglomerate Reliance Industries, which has been classified as Integrated Oil & Gas by BSE, and as Refineries/Marketing by NSE. Hindustan Unilever has been categorised as Diversified by NSE and Personal Products by BSE.  Besides, BSE has classifications such as Miscellaneous Commercial Services, Other Agricultural Products and Other Food Products. Common classification will definitely eliminate ambiguity on industry and sector. If local bourses adopt the same strategy of that of global majors, a company that carries out two or more lines of business that differ substantially from each other (like Reliance) will be allocated to a sector whose definition is most closely coincides with the source of the company’s revenue or the source of the majority of its revenue. This will also check companies that often change their nomenclature to remain the flavour of every season, where gullible investors fall prey.

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