Taking permitted stocks into index is a good move

KS Badri Narayanan Chennai | Updated on August 24, 2019

Nestle likely to enter Nifty indices

The NSE last week made a significant shift in the process of selecting stocks to be part of Nifty indices. Under the new proposal, the NSE will also include stocks that are not listed on its platform but are trading under the permitted category.

According to the NSE, however, convertible stocks, bonds, warrants, rights, preferred stocks that provide guaranteed fixed returns and stocks under the BZ series will not be eligible for inclusion in the Nifty indices.

Stock exchanges allow trading of stocks under two heads — listed and permitted. Companies that wish to list their stocks have to enter a listing agreement with the exchanges, which stipulates various criteria including paid-up capital, market capitalisation, net worth, distribution of shareholding, and track record of promoters, among others.

For permitted category, exchanges select the stocks that are listed on other bourses. Currently, over two dozen stocks are trading under the permitted category on the NSE.

Till now, the NSE considers only listed stocks for inclusion in the indices.

NSE Indices currently maintain equity indices comprising broad-based benchmark indices, sectoral indices, strategy indices, thematic indices, fixed income and customised indices.

There are 13 broad market indices on the NSE that include Nifty 50, Nifty Next 50, Nifty 500, Nifty 200, Nifty 100, Nifty Midcap 150 and Nifty Smallcap 250; it also has 11 sectoral indices, of which the Bank Nifty is the most popular, due to active F&O trading.

BSE can emulate

The new move by the NSE is significant because it would allow shares of companies such as Nestle India, Abbott India, Bayer Cropscience and Multi Commodity Exchange of India to be part of its index basket. Currently, these stocks are under the permitted category on the NSE. Even the BSE should emulate this move.

Nestle’s market capitalisation at ₹1.20-lakh crore makes it the 20th most valuable stock now.

That means Nestle has a very high chance of breaking into the Nifty 50, which is widely followed by various fund managers. According to the NSE, over 60 funds (index, ETF) are launched based on Nifty indices.

Most indices are re-balanced on semi-annual basis, based on the cut-off date of January 31 and July 31 of each year, ie, for semi-annual review of indices, average data for six months ending the cut-off date is considered.

Four weeks prior notice is given to the market from the date of change.

Earlier during 2009-12, there were deliberations among market participants that SEBI should roll out a framework for listing shares under the permitted category.

But so far, SEBI has left the freedom to the exchanges to select direct trading of stocks that are listed on another exchange.

Published on August 24, 2019

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