CHAPTER 1

1.1 INTRODUCTION

Stock exchanges to some extent play an important role as indicators, reflecting the performance of the
country's economic state of health. Stock market is a place where securities are bought and sold. It is
exposed to a high degree of volatility; prices fluctuate within minutes and are determined by the demand
and supply of stocks at a given time. Stockbrokers are the ones who buy and sell securities on behalf of
individuals and institutions for some commission. The Securities and Exchange Board of India (SEBI) is
the authorized body, which regulates the operations of stock exchanges, banks and other financial
institutions.
The past performances in the capital markets especially the securities scam by Harshad Mehta has led to
tightening of the operations by SEBI. In addition the international trading and investment exposure has
made it imperative to better operational efficiency. With the view to improve, discipline and bring
greater transparency in this sector, constant efforts are being made and to a certain extent improvements
have been made. As the condition of capital markets are constantly improving, it has started drawing
attention of lot more people than before. On the career related aspects, professionals have opportunities
to choose from for a wide range of jobs available in a number of organizations in this sector and one can
expect to have good times ahead of him.

1.1 INDIAN CAPITAL MARKET OVERVIEW

1.1.1 Evolution
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The
earliest records of security dealings in India are meager and obscure. The East India Company was the
dominant institution in those days and business in its loan securities used to be transacted towards the
close of the eighteenth century. Thus, at present, there are totally twenty-one recognized stock exchanges
in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock
Exchange of India Limited (NSEIL).

1.1.2 Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges is limited to listed securities of public limited companies. They are
broadly divided into two categories, namely, specified securities (forward list) and non-specified
securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital
of at least `50 million and a market capitalization of at least `100 million and having more than 20,000
shareholders are, normally, put in the specified group and the balance in non-specified group. Two types
of transactions can be carried out on the Indian stock exchanges:
(a) Spot delivery transactions "for delivery and payment within the time or on the date stipulated when
entering into the contract which shall not be more than 14 days following the date of the contract”
(b) Forward transactions "delivery and payment can be extended by further period of 14 days each so
that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only
in the case of specified shares. The brokers who carry over the outstanding pay carry over charges
(cantango or backwardation), which are usually determined by the rates of interest prevailing. A member
broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a
commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own
account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges,
where a member can act as a jobber or a broker only. The nature of trading on Indian Stock Exchanges
are that of age old conventional style of face-to-face trading with bids and offers being made by open
outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very
recent times.

1.1.3 Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional
inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and
benami transactions, which affected the small investors to a great extent. To provide improved services
to investors, the country's first ring less, scrip less, electronic stock exchange - OTCEI - was created in
1992 by country's premier financial institutions - Unit Trust of India, Industrial Credit and Investment
Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance
Corporation of India, General Insurance Corporation and its subsidiaries and Can Bank Financial
Services. Trading at OTCEI is done over the centers spread across the country. Securities traded on the
OTCEI are classified into:
 Listed Securities - The shares and debentures of the companies listed on the OTC can be bought
or sold at any OTC counter all over the country and they should not be listed anywhere else
 Permitted Securities - Certain shares and debentures listed on other exchanges and units of
mutual funds are allowed to be traded
 Initiated debentures - Any equity holding at least one-lakh debentures of particular scrip can
offer them for trading on the OTC.
OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of
listed securities and initiated debentures are not traded at OTC. The original certificate will be safely
with the custodian. But, a counter receipt is generated out at the counter, which substitutes the share
certificate and is used for all transactions. In the case of permitted securities, the system is similar to a
traditional stock exchange. The difference is that the delivery and payment procedure will be completed
within 14 days. Compared to the traditional Exchanges, OTC Exchange network has the following
advantages:
 OTCEI has widely dispersed trading mechanism across the country, whichprovides greater
liquidity and lesser risk of intermediary charges.
 Greater transparency and accuracy of prices is obtained due to the screenbased scrip less trading.
National Stock Exchange (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market
trading system on par with the international standards. On the basis of the recommendations of high-
powered Pherwani Committee, Industrial Development Bank of India, Industrial Credit and Investment
Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected
commercial banks and others incorporated the National Stock Exchange in 1992. Trading at NSE can be
classified under two broad categories:
 Wholesale debt market and
 Capital market.
Wholesale debt market operations are similar to money market operations-institutions and corporate
bodies enter into high value transactions in financial instruments such as government securities, treasury
bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
There are two kinds of players in NSE:
  Trading members and
 Participants.
Recognized members of NSE are called trading members who trade on behalf of themselves and their
clients. Participants include trading members and large players like banks who take direct settlement
responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanism,
which adopts the principle of an order-driven market. Trading members can stay at their offices and
execute the trading, since they are linked through a communication network. The prices at which the
buyer and seller are willing to transact will appear on the screen. When the prices match the transaction
will be completed and a confirmation slip will be printed at the office of the trading member. NSE has
several advantages over the traditional trading exchanges. They are as follows:
 NSE brings an integrated stock market trading network across the nation. Investors can trade at
the same price from anywhere in the country since inter-market operations are streamlined
coupled with the countrywide access to the securities.
 Delays in communication, late payments and the malpractice’s prevailing in the traditional
trading mechanism can be done away with greater operational efficiency and informational
transparency in the stock market operations, with the support of total computerized network.
Unless stock markets provide professionals service to small investors, and foreign investors will not be
interested in capital market operations. And capital market being one of the major sources of long-term
finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE
gains vital importance in the Indian capital market system
.
1.1.5 Bombay Stock Exchange(BSE) – Sensex

For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of
experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became
members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of `1.
Since then, the country's capital markets have passed through both good and bad periods. The journey in
the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the
ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a
stock index that subsequently became the barometer of the Indian stock market. SENSEX is not only
scientifically designed but also based on globally accepted construction and review methodology. First
compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid
and representative companies. The base year of SENSEX is 1978-79 and the base value is 100. The
index is widely reported in both domestic and international markets through print as well as electronic
media.
The Index was initially calculated based on the "Full Market Capitalization" methodology but was
shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market
Capitalization" methodology of index construction is regarded as an industry best practice globally. All
major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.
Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the
Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long
period of time (From 1979 onwards). Small wonder, The SENSEX has over the years become one of the
most prominent brands in the country. The growth of equity markets in India has been phenomenal in the
decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of
various bull and bear runs. The SENSEX captured all these events in the most judicial manner. One can
identify the booms and busts of the Indian stock market through SENSEX.

NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and
management of the Exchange is completely divorced from the right to trade on it. Though the impetus
for its establishment came from policy makers in the country, it has been set up as a public limited
company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and
trading is in the hands of three different sets of people. NSE is owned by a set of leading financial
institutions, banks, insurance companies and other financial intermediaries and is managed by
professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated
any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public
interest framework.

The NSE model however, does not preclude, but in fact accommodates involvement, support and
contribution of trading members in a variety of ways. Its Board comprises of senior executives from
promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance,
taxation, etc, public representatives, nominees of SEBI and one full time executive of the Exchange.

While the Board deals with broad policy issues, decisions relating to market operations are delegated by
the Board to various committees constituted by it. Such committees includes representatives from trading
members, professionals, the public and the management.The day-to-day management of the Exchange is
delegated to the Managing Director who is supported by a team ofprofessional staff.

BSE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three
centuries in its 133 years of existence. What is now popularly known as BSE was established as "The
Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the
Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-
eminent role in the development of the Indian capital market is widely recognized. It migrated from the
open outcry system to an online screen-based order driven trading system in 1995. Earlier an Association
Of Persons (AOP), BSE is now a corporatised and demutualised entity incorporated under the provisions
of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005
notified by the Securities and Exchange Board of India (SEBI). With demutualisation, BSE has two of
world's best exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it
with an efficient access to resources. There is perhaps no major corporate in India which has not sourced
BSE's services in raising resources from the capital market.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the
world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD
1.79 trillion . An investor can choose from more than 4,700 listed companies, which for easy reference,
are classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature , and is tracked
worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is constructed on a
'free-float' methodology, and is sensitive to market sentiments and market realities. Apart from the
SENSEX, BSE offers 21 indices, including 12 sectoral indices. BSE has entered into an index
cooperation agreement with Deutsche Börse. This agreement has made SENSEX and other BSE indices
available to investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global
leader in ETFs through its iShares® brand, has created the 'iShares® BSE SENSEX India Tracker'
which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian
equity market.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It brings to the
investors a trading tool that can be easily used for the purposes of investment, trading, hedging and
arbitrage. SPIcE allows small investors to take a long-term view of the market.

BSE provides an efficient and transparent market for trading in equity, debt instruments and derivatives.
It has a nation-wide reach with a presence in more than 359 cities and towns of India. BSE has always
been at par with the international standards. The systems and processes are designed to safeguard market
integrity and enhance transparency in operations. BSE is the first exchange in India and the second in the
world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in
the world to receive Information Security Management System Standard BS 7799-2-2002 certification
for its BSE On-line Trading System (BOLT).

BSE continues to innovate. In recent times, it has become the first national level stock exchange to
launch its website in Gujarati and Hindi to reach out to a larger number of investors. It has successfully
launched a reporting platform for corporate bonds in India christened the ICDM or Indian Corporate
Debt Market and a unique ticker-cum-screen aptly named 'BSE Broadcast' which enables information
dissemination to the common man on the street.

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic Reporting
System) to facilitate information flow and increase transparency in the Indian capital market. While the
Directors Database provides a single-point access to information on the boards of directors of listed
companies, the ICERS facilitates the corporates in sharing with BSE their corporate announcements.

BSE also has a wide range of services to empower investors and facilitate smooth transactions:

Investor Services: The Department of Investor Services redresses grievances of investors. BSE
was the first exchange in the country to provide an amount of Rs.1 million towards the investor
protection fund; it is an amount higher than that of any exchange in the country. BSE launched a
nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which 264
programmes were held in more than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen
based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located
across over 359 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchange-based
Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world
to trade on the BSE platform.

Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the price
movements, volume positions and members' positions and real-time measurement of default risk,
market reconstruction and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification, in collaboration
with reputed management institutes and universities. It offers over 40 courses on various aspects of
the capital market and financial sector. More than 20,000 people have attended the BTI
programmes

Awards

 The World Council of Corporate Governance has awarded the Golden Peacock Global CSR
Award for BSE's initiatives in Corporate Social Responsibility (CSR).
 The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007
have been awarded the ICAI awards for excellence in financial reporting.
  The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts
in employer branding through talent management at work, health management at work and
excellence in HR through technology

Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to
remain an icon in the Indian capital market.

For more details & information, please visit our website: www.bseindia.com

1.4 SECTORIAL INDICES NSE LTD:

The sectorial analysis is typically employed by investors who plan to select better stocks to invest.
Investors normally identify the most promising sectors and review the financial performance of
companies within the sector to determine which individual stock would provide better returns and
purchase such stocks ultimately. The study of sectoral efficiency could provide useful input to the
investors to identify the efficient sectors and to channel the available resources into the profitable sectors.
This study tested the efficiency of two major stock exchanges, namely BSE and NSE sectoral indices by
using daily share price returns. This study measured the random distribution and weak form efficiency in
BSE and NSE sectoral indices. The analysis consisted of descriptive statistics, runs and autocorrelation
test. The runs test indicated that the market did not follow random distribution.

An Index is used to give information about the price movements of products in the financial,
commodities or any other markets. Financial indexes are constructed to measure price movements of
stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the
overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that
are representative of the whole market or a specified sector or segment of the market. An Index is
calculated with reference to a base period and a base index value.
Stock market indexes are useful for a variety of reasons. Some of them are :
 They provide a historical comparison of returns on money invested in the stock market against other
forms of investments such as gold or debt.
 They can be used as a standard against which to compare the performance of an equity fund.
 In It is a lead indicator of the performance of the overall economy or a sector of the economy
 Stock indexes reflect highly up to date information
 Modern financial applications such as Index Funds, Index Futures, Index Options play an important role
in financial investments and risk management

NSE Indices Limited (formerly known as India Index Services & Products Limited), or NSE Indices,
owns and manages a portfolio of 67 indices under NIFTY brand as of September 30, 2016, including
NIFTY 50. NIFTY indices are used as benchmarks for products traded on NSE. NIFTY indices served as
the benchmark index for 38 ETFs listed in India and 12 ETFs listed abroad as of September 30, 2016.
Derivatives benchmarked to NIFTY indices were also available for trading on four international stock
exchanges as of November 30, 2016, pursuant to cross-listing arrangements and license agreements with
the Singapore Exchange, the Chicago Mercantile Exchange, the Taiwan Futures Exchange and the Osaka
Securities Exchange.

NSE Indices Limited ("NSE Indices") offers a wide range of products and services which are key support
tools for the equity markets. We provide reliable, accurate and valuable data on indices and index related
services to cater to the needs of various segments of users. Our speciality is indices based on Indian
equity markets, which may be used for benchmarking, trading or research. Use of NSE Indices data or
name or indices requires a license or subscription.
Financial products on NSE Indices Indices
NSE Indices maintains, develops, compiles and disseminates entire gamut of equity indices. Licensing is
mandatory for tracking the performance of the indices developed by the NSE Indices. Licensing is also
required for use of the name of indices developed by the NSE Indices in part or in full. Fees for licensing
would vary according to the type of the product and the period.
Indices offered by the NSE Indices are useful for fund managers, corporates, brokers and all such
enterprises connected with investments in the equity markets. These indices can be used for tracking the
markets, understanding the performance of a company vis-a-vis the market, determining how an
investor’s portfolio is performing as compared to the market, trading derivative products and most
importantly for development of index based funds by mutual funds.
Data subscription
NSE Indices provides index data on a periodic basis through its designated URL. Data includes Index
values, index constituents etc. This is a paid service and the subscription charges vary depending upon
the type of data sought and the period.
Customized Indices
NSE Indices undertakes development & maintenance of customised indices for clients for tracking the
performance of the client portfolio vis-à-vis objectively defined benchmarks, or for benchmarking NAV
performance to customised indices. The customised indices can be sub-sets of an existing index or a
completely new index viz; sector indices, individual business group indices, industry indices, etc.
Customised indices serve as the basis for multiple types of investment products; structured products,
over-the-counter (OTC) options and notes, mutual funds and ETFs.

Investors not only like return, but also they dislike risk. While investing in capital market, investors are
always concerned about the market movements or changes in the value of capital market index.The
development of regulated and well structured market with latest technology attracts the institutional
investors as well as the HNI and retail investors. Initially, only stock market index was formed to
measure the market performance and later on the indices for various sectors were developed to measure
the performance of each sector. These indices are providing authentic and comprehensive information to
investing community and it gives an idea to take decision regarding their equity investments.During the
later part of last decade (2008 to 2010) the impact of global meltdown was very severe and most of the
global indices were falling down and Indian equity market also followed the same trend. The effort taken
by the monetary authorities of various countries started to yield the fruits on the early part of this
decade.Global financial market is recovering in a fast pace after the economic meltdown which has
influenced all the business sectors invariably. Most of the global indices are in a healthy trend and a few
of them have touched the new life time high. India too is experiencing the same. The Indian stock market
index Nifty had touched the new high during Dec 2013. But still, the investing community belongs to
HNI and Retail are in a dilemma to make investment in equity market and they do fear that whether their
investments will be safe or not. Even though the situation has stabilized well, there is an ambiguity
among the investors about the performance of indices. In this background, an attempt is made to study
the comparative performance of various sectoral indices of Nationa
 Sustaining the growth momentum and achieving an annual average growth of 7-8 % in the next
five years.
 Simplifying procedures and relaxing entry barriers for business activities.
 Checking the growth of population; India is the second highest populated country in the world
after China. However in terms of density India exceeds China as India's land area is almost half
of China's total land. Due to a high population growth, GNI per capita remains very poor. It was
only $ 2880 in 2003 (world bank figures).
 Boosting agricultural growth through diversification and development of agro processing.
 Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in
agriculture but also the unprecedented number of women and teenagers joining the labour force
every year.
 Developing world-class infrastructure for sustaining growth in all the sectors of the economy.
 Allowing foreign investment in more areas
CNX IT index:
Information Technology (IT) industry has played a major role in the Indian economy during the last few
years. A number of large, profitable Indian companies today belong to the IT sector and a great deal of
investment interest is now focused on the IT sector. Companies in this index are those that have more
than 50% of their turnover from IT related activities like IT Infrastructure, IT Education and Software
Training, Telecommunication Services and Networking Infrastructure, Software Development, Hardware
Manufacturer’s, Vending, Support and Maintenance. The CNX IT index consists of 20 companies based
on free float market capitalization method with a base date of 1st January, 1996. The base value of index
has started with 1000 and it was revised to 100 with effect from 28th May, 2004. CNX Bank index: The
Indian banking Industry has been undergoing major changes, reflecting a number of underlying
developments.

CNX Bank index is an index comprised of the most liquid and large capitalized Indian banking stocks. It
provides investors and market intermediaries with a benchmark that captures the capital market
performance of Indian banks. The index has 12 stocks from the banking sector which trade on the
National Stock Exchange. CNX Bank index has started in 1st January, 2000 using free float market
capitalization method with base value of 1000.

CNX Infrastructure index:

CNX Infrastructure index includes companies belonging to Telecom, Power, Port, Air, Roads, Railways,
shipping and other Utility services providers. It is well recognized that quality infrastructure is one of the
most important necessities for unleashing high and sustained growth. Government outlay for
infrastructure has increased significantly over the years. Recognizing the needs of the market, India
Index Services & Products Limited (IISL) has developed CNX Infrastructure index to capture the
performance of the companies in the infrastructure sector. The CNX Infrastructure index has started on
1st January, 2004 with a base value of 1000. Final selection of 25 companies included in the index based
on free float market capitalization weighted method.

CNX Auto index:

The CNX Auto index is designed to reflect the behaviour and performance of the automobiles sector
which includes manufacturers of cars & motorcycles, heavy vehicles, auto ancillaries, tyres, etc., The
CNX Auto index comprises of 15 stocks that are listed on the National Stock Exchange. The CNX Auto
index has started in 1st January, 2004 using free float market capitalization method with a base value of
1000, wherein the level of the index reflects the total free float market value of all the stocks in the index
relative to particular base market capitalization value. International Journal of Marketing, Financial
Services &

As part of the suit of index offerings, NSE Indices Limited (formerly known as India Index
Services & Products Limited-IISL) calculates & disseminate series of sectoral indices to
represent the performance of companies that represent a movement in specific sector. Sectoral
indices as listed hereunder are calculated & disseminated by NSE Indices Limited taking into
account the stocks listed on National Stock Exchange (NSE). All the sectoral indices are
computed using the free-float market capitalization method.

1. NIFTY Auto Index: The index is designed to reflect the behaviour and performance of the
Automobiles sector which includes manufacturers of cars & motorcycles, heavy vehicles,
auto ancillaries, tyres, etc. The index comprises of maximum of 15 stocks and base date of
the index is January 1, 2004 and a base value of 1000 points.

2. NIFTY Bank Index: The index is designed to reflect the behaviour and performance of
the large and liquid banks. The index comprises of maximum of 12 stocks and base date of
 the index is January 1, 2000 and a base value of 1000 points.

3. NIFTY Financial Services Index: The index is designed to reflect the behaviour and
performance of the Indian financial market which includes banks, financial institutions and
housing finance and other financial services companies. The index comprises of maximum
of 20 stocks and base date of the index is January 1, 2004 and base value of 1000 points.

4. NIFTY FMCG Index: The index is designed to reflect the behaviour and performance of
Fast Moving Consumer Goods (FMCG). They are those goods and products, which are
non-durable, mass consumption products and available off the shelf. The index comprises
of maximum of 15 companies and base date of the index is January 1, 1996 and base value
of 1000 points.

5. NIFTY IT Index: The index is designed to reflect the behaviour of companies engaged
into activities such as IT infrastructure, IT education and software training, networking
infrastructure, software development, hardware, IT support and maintenance etc. The index
comprised of 20 companies with base date of the index being January 1, 1996. The base value
of the index was revised from 1000 to 100 with effect from May 28, 2004.
 Further, effective May 29, 2015, the index is computed with maximum of 10 companies
and weights of each company in the index are capped at 25%. At the time of rebalancing
of shares/ change in index constituents/ change in investable weight factors (IWFs), the
weightage of the index constituent (where applicable) is capped at 25%. Weightage of such
stock may increase beyond 25% between the rebalancing periods.

6. NIFTY Media Index: The NIFTY Media Index is designed to reflect the behavior and
performance of sectors such as media & entertainment, printing and publishing. The index
comprises of maximum of 15 companies. The base date of the index is December 30, 2005
and base value of 1000 points.

7. NIFTY Metal Index: The NIFTY Metal Index is designed to reflect the behavior and
performance of the Metals sector including mining. The index comprises of maximum of
15 stocks. The base date of the index is January 1, 2004 and base value of 1000 points.

Effective September 28, 2015, the weights of each company in the index is capped at 20%.
At the time of rebalancing of shares/ change in index constituents/ change in investable
weight factors (IWFs), the weightage of the index constituent (where applicable) is capped
at 20%. Weightage of such stock may increase beyond 20% between the rebalancing
periods.

8. NIFTY Pharma Index: The NIFTY Pharma Index is designed to reflect the behavior and
performance of the companies that are engaged into manufacturing of pharmaceuticals. The
index comprises of maximum of 10 stocks. The base date of the index is January 1, 2001
and base value of 1000 points.

9. NIFTY PSU Bank Index: The NIFTY PSU Bank Index is designed to reflect the behavior
and performance of the public sector banks. The index comprises of maximum of 12 stocks.
The base date of the index is January 1, 2004 and base value of 1000 points.

10. NIFTY Private Bank Index: The NIFTY Private Bank Index is designed to reflect the
behavior and performance of the banks from private sector. The index comprises of 10
stocks and weights of each company in the index are capped at 25%. The base date of the
index is April 1, 2005 and base value of 1000 points.
11. NIFTY Realty Index: The NIFTY Realty Index is designed to reflect the behavior and
performance of the companies that are engaged into construction of residential & commercial
real estate properties. The index comprises of maximum of 10 stocks. The base date of the
index is December 29, 2006 and base value of 1000 points.
Eligible Securities:

All equity shares listed on the NSE are eligible for inclusion in the NIFTY indices. Convertible
stock, bonds, warrants, rights, and preferred stock that provide a guaranteed fixed return are
not eligible for inclusion in the NIFTY indices.

Differential Voting Rights:

Equity securities with Differential Voting Rights (DVR) are eligible for inclusion in the index
subject to fulfilment of criteria given below:
Market capitalisation criteria is measured at a company level by aggregating the market
capitalisation of individual class of security meeting the liquidity criteria for the respective
index
Free float of DVR equity class share should be at least 10% of free-float market
capitalization of the company (voting equity class share and DVR equity class share) and
100% free-float market capitalization of last security in respective index
It should meet liquidity criteria applicable for the respective index

Upon inclusion of DVRs in index, the index may not have fixed number of securities. For
example, if DVR of an existing NIFTY 50 constituent is included in NIFTY 50, the NIFTY
index will have 51 securities but continue to have 50 companies
It is possible that the DVR is eligible for inclusion in the index whereas the full voting rights
security class is ineligible. In such scenario, the DVRs shall be included in the index
irrespective of whether full voting rights share class is part of index

Index Maintenance:

Index Reconstitution:

Index maintenance plays a crucial role in ensuring the stability of the index. The indices are
reconstituted semi-annually considering 6 months data ending January and July respectively.
The replacement of stocks in broad market indices (if any) are generally implemented from the
first working day after F&O expiry of March and September. In case of any replacement in the
index, a four weeks’ prior notice is given to the market participants.
Additional index reconstitution may be undertaken in case any of the index constituent
undergoes a scheme of arrangement for corporate events such as merger, spin-off, compulsory
delisting or suspension etc. The equity shareholders’ approval to a scheme of arrangement is
considered as a trigger to initiate the exclusion of such stock from the index through additional
index reconstitution.

Index Governance:

Index Committee
NSE Indices Limited has constituted an Index Policy Committee, which is involved in the
policy and guidelines for managing its indices. The Index Maintenance Sub- Committee makes
all decisions on additions and deletions of companies in the index within the policies and
guidelines prescribed by the Index Policy Committee.
A professional team at NSE Indices Limited manages the index. There is a three-tier
governance structure comprising the Board of Directors of NSE Indices Limited, the Index
Policy Committee, and the Index Maintenance Sub-Committee. NSE Indices Limited has
constituted the Index Policy Committee, which is involved in the policy and guidelines for
managing its indices. The Index Maintenance Sub-committee makes all decisions on additions
and deletions of companies in the Index.

Index Policy
The indices use transparent, researched and publicly documented rules for its maintenance.
These rules are applied regularly to manage changes to the indices. Index reviews are carried
out periodically to ensure that each security in the index fulfills eligibility criteria.

Announcements
All index-related announcements are posted on the websites of NSE Indices Limited and NSE.
Changes impacting the constituent list are also posted on the Web site. Please refer to the
www.niftyindices.com and www.nseindia.com.

Holiday Schedule
For the calculation of indices, the NSE Indices Limited follows the official holiday schedule.
A complete holiday schedule for the year is available on the NSE Indices Limited and NSE
website. Please refer to the www.niftyindices.com and www.nseindia.com.
Data Source
Prices of index constituents are sourced from NSE

Index Precision
The level of precision for index calculation is as follows:
 Shares outstanding are expressed in units
 Investible weight factors (IWFs) are expressed in two decimals
 Capping factors are expressed in six decimals
 Float-adjusted market capitalization is stated to two decimal places
 Index values are disseminated up to two decimal places
Index Recalculations
All NIFTY family of indices are recalculated whenever errors occur. Users of the NIFTY
indices are notified through appropriate channel of communication.

Market Feedback & Index Methodology Review

NSE Indices Limited is committed to ensure that all NIFTY indices are relevant for the market
participants. In order to ensure this, NSE Indices Limited on an on-going basis interacts with
the stakeholders inviting the feedback through various channels of communication. The
feedback received from the market participants forms a key input for all index related aspects.

Review of methodology of NIFTY indices is carried out on an annual basis. Additionally, NSE
Indices Limited also considers any feedback that it may receive with regards to index
methodology as part of on-going market interactions. Any changes to the index methodology
is approved by the Committee and the same is announced through a press release.

Other

In case of a market stress or disruption, NSE Indices Limited will review and deal with the
situation on consultative basis with the National Stock Exchange of India Ltd. (NSE) as NSE
is source for price data for computation of equity indices.

All indices are expected to reflect the performance of a basket of stocks selected based on the
defined guidelines and theme. Every index user is advised to evaluate the benefits of index and
take an informed decision before using the index for self or creation of index-linked products.
NSE Indices Limited does not accept any liability for any losses, claims, expenses etc. that may
be incurred by any person as a result of usage of NIFTY family of indices as a result of reliance
of the ground rules, any errors or inaccuracies.
Stock Selection Criteria
Companies ranked within top 800 based on both average daily turnover and average daily
full market capitalisation based on previous six months period data
Companies should form part of respective sector universe.
The company's trading frequency should be at least 90% in the last six months.
The company should have a listing history of 6 months. A company which comes out with
an IPO will be eligible for inclusion in the index, if it fulfils the normal eligibility criteria
for the index for a 3 month period instead of a 6 month period.
At the time of index reconstitution, a company which has undergone a scheme of
arrangement for corporate event such as spin-off, capital restructuring etc. would be
considered eligible for inclusion in the index if as on the cut-off date for sourcing data of
preceding six months for index reconstitution, a company has completed three calendar
months of trading period after the stock has traded on ex. basis subject to fulfilment of all
eligibility criteria for inclusion in the index..
In case of NIFTY Bank index, companies that are allowed to trade in F&O segment at NSE
are only eligible to be a constituent of the index.
In case of NIFTY IT and NIFTY Private Bank Index, a preference shall be given to
companies that are available for trading in NSE’s Futures & Options segment at the time
of final selection.
The companies are sorted in the descending order of the Free-Float Market capitalization
(FF MCap) and final selection of companies shall be made based on the FF MCap to form
part of the index.
Companies will be included if free-float market capitalisation is 1.5 times the free- float
market capitalization of the smallest index constituent in respective index.
The review will take place on a semi-annual basis.

When a stock is replaced by another stock in the index, the index divisor is adjusted so the
change in index market value that results from the addition and deletion does not change the
index level.

Constituent capping:
Weights of constituents of NIFTY IT, NIFTY Metal and NIFTY Private Bank index will be
capped at 25%, 20% & 25% (“maximum capping limit”) respectively based on below
mentioned guidelines. Stock level capping is not applicable for any other indices listed out in this document.

This means that at the time of rebalancing of the index, no single constituent shall have weightage of more than
maximum capping limits as stated above. The capping factor of stocks is realigned upon change in equity,
investible weighted factor (IWF), replacement of scrips in the index, periodic rebalancing and on a quarterly
basis after the expiry of the F&O contracts in March, June, September and December.
In the event of weight realignment, capping factors will be calculated for all constituents (for capped indices)
whose uncapped weight is greater than maximum capping limits as stated above. Weightage of such constituent
may increase beyond maximum capping limit between the rebalancing periods depending on the price
movement. The capping factor is calculated considering the closing prices of the index constituents 5 working
days prior to the effective date of the changes for all constituents.

Changes in the index level reflect changes in the market capitalization of the index which are caused by stock price
movements in the market. They do not reflect changes in the market capitalization of the index, or of the individual
stocks, that are caused by corporate actions such as dividend payments, stock splits, mergers, or acquisitions etc.

Calculation and dissemination

The index is calculated online on all days that the National Stock Exchange of India is open for trading in equity
shares and disseminated through trading terminals and website.

Corporate Actions and Share Updates

Maintenance of NIFTY indices includes carrying out adjustments for corporate actions like stock splits, stock
dividends, share changes and scheme of arrangements. Some corporate actions, such as stock splits and stock
dividends, require simple changes in the equity shares outstanding and the stock prices of the companies in the
index.

Other corporate actions, such as share issuances, change the market value of an index and require a divisor
adjustment to prevent the value of the index from changing.

This helps in keeping the value of the index accurate and ensures that the movement of the index does not get
impacted due to corporate actions of the companies in it. Divisor adjustments are made after the close of trading
and after the calculation of the closing value of the index. Corporate actions such as splits, stock dividends, spin-
offs, rights offerings, and share changes are applied on the ex-date.

About NIFTY Multi-Factor Index series

The 4 multi-factor indices launched by IISL are:

1. NIFTY Alpha Low-Volatility 30

2. NIFTY Quality Low-Volatility 30
3. NIFTY Alpha Quality Low-Volatility 30

4. NIFTY Alpha Quality Value Low-Volatility 30

Each of the above 4 indices track a portfolio of stocks selected based on combination of 2 or more
factors. The factor details along with weights are presented in the table below.

Factors Weights
Index
Number of factors Alpha Low-Vol. Quality Value
NIFTY Alpha Low-Volatility 30 2 50% 50% - -
NIFTY Quality Low-Volatility 30 2 - 50% 50% -
NIFTY Alpha Quality Low-Volatility 30 3 33.33% 33.33% 33.33% -
NIFTY Alpha Quality Value Low-Volatility 30 4 25% 25% 25% 25%
Exhibit 1: Factor details along with weights

Highlights of NIFTY multi-factor index series:

 The index series has a base date of April 01, 2005 and a base value of 1000

 Stocks from NIFTY 100 and NIFTY Midcap 50 at the time of review are eligible for inclusion in the
indices
 Indices consist of well diversified portfolio of 30 stocks selected based on combination of 2 or more factors
from the 4 factors – Alpha, Quality, Value and Low-Volatility
 Stock selection and weights are derived from factor scores resulting in portfolio capturing the essence
of underlying factor dynamics
 With threshold mechanism that lays down stringent criteria for inclusion and exclusion, the index seeks to
 minimize degree of churning and replication cost

Passive Investment Methodology

Alpha Rule-based
portfolio
design

Value Quality Active

Active Investment Style
return

Factor-based Index Combines

Low-Volatility
Design “Best of both
worlds”

Exhibit 2: Key factors which contribute to risk premium in

Exhibit 3 : Multi-factor indices combine the benefits of passive and
long term
active investment styles

About NIFTY Singles Factor Indices

IISL currently maintains various single-factor based indices. These indices are individually based on
Alpha, Quality, Value and Low-Volatility factors. The framework used by IISL for single factor indices is
given in exhibit 4 below:
 - High ROCE

Yield deviation of
Alpha

have pricing have reported have reported have pricing

previous 3
1 year f 1 year

Exhibit 4: Parameters used for weighing factor indices

Single factor-based index strategies typically exhibit high cyclicality

Period Market Capitalization based Indices Single Factor index strategies

Alpha Quality Value Low Volatility

Year NIFTY 50 NIFTY 100 NIFTY 200
Portfolio Portfolio Portfolio Portfolio
2005 37.19% 35.75% 35.58% 34.11% 31.71% 23.08% 47.35%
2006 39.83% 38.03% 34.64% 50.41% 18.56% 10.07% 34.61%
2007 54.77% 57.53% 63.66% 84.94% 39.28% 53.96% 38.43%
2008 -51.79% -53.69% -56.61% -66.96% -50.75% -52.64% -44.60%
2009 75.76% 82.72% 86.58% 65.12% 108.12% 166.41% 82.17%
2010 17.95% 17.91% 14.20% 14.84% 16.35% 25.50% 24.40%
2011 -24.62% -25.81% -26.97% -18.56% -24.74% -17.54% -15.45%
2012 27.70% 30.60% 31.64% 38.88% 30.40% 25.59% 30.75%
2013 6.76% 6.46% 4.44% 9.29% 8.78% -2.00% 6.55%
2014 31.39% 33.17% 35.53% 50.38% 37.17% 35.99% 40.86%
2015 -4.06% -2.41% -1.90% 16.90% 6.80% -7.68% 11.66%
2016 3.01% 3.60% 3.70% 19.72% -6.75% 6.11% 1.83%

Exhibit 5: Calendar year wise returns delivered by market capitalization based and single-factor indices.

Exhibit 5 above shows calendar year-wise returns delivered by market capitalization based and single-
factor based index strategies. While single factor indices have delivered a risk premium over market
capitalization based indices for various years, they tend to display cyclicality.

Mentioned below is a summary of how each of the 4 single factors has behaved across time

Alpha: Historically, alpha factor based portfolio exhibited pro-cyclicality with business cycles by
outperforming NIFTY 50 during periods of bull-run in 2007 and during economic recovery in 2009 and
2012, however, showed low returns in economic downturn of 2008 and 2011.

Quality: Quality factor based portfolio significantly outperformed NIFTY 50 during period of economic
recovery in 2009 and 2012, however, delivered similar returns as NIFTY 50 during economic downturn
of 2008 and 2011. Historically, quality factor based portfolio included sectors like IT, FMCG and
pharmaceutical which include companies that are typically cash-rich, low on gearing and boast of higher
operating & net margins. Lower returns of quality factor during 2016 phase can be attributed to the
draw-down in IT and Pharma sector which contributed to around 40% index exposure.
Value: Value factor based portfolio delivered significantly better performance during economic recovery
in 2009, however delivered similar returns as NIFTY 50 during downturn of 2008. Value factor based
portfolio witnessed upturn during commodity rallies of 2007, 2010 and 2016. Historically, value based
portfolio has had greater exposure towards sectors such as Financial Services, IT, Consumer goods and
Metals.

Low-Volatility: Historically, low-volatility portfolio has generated high return with low risk in most of the
calendar years. The index included companies from FMCG, pharmaceutical and IT sector having
relatively inelastic demand-supply dynamics and exhibiting robust behavior during periods of economic
downturn of 2008 and 2011. Low-Volatility index strategy has remained one of best performing
strategies over long term period.
Multi-Factor index strategies tend to counter the cyclical behavior of single-factor index
strategies by diversifying across factors

Period Single Factor Portfolio Multi Factor Indices

NIFTY NIFTY
NIFTY NIFTY
Alpha Alpha Quality
Quality Alpha Low- Volatility Value Alpha Quality
Quality Value
Year NIFTY 50 Factor Factor Factor Factor Low- Low-
Low- Low-
Portfolio Portfolio Portfolio Portfolio Volatility Volatility
Volatility Volatility
30 30
30 30
2005 37.19% 31.71% 34.11% 47.35% 23.08% 50.15% 44.86% 43.06% 33.98%
2006 39.83% 18.56% 50.41% 34.61% 10.07% 36.67% 27.07% 31.58% 22.79%
2007 54.77% 39.28% 84.94% 38.43% 53.96% 59.79% 26.51% 35.87% 37.62%
2008 -51.79% -50.75% -66.96% -44.60% -52.64% -50.27% -41.47% -43.93% -49.01%
2009 75.76% 108.12% 65.12% 82.17% 166.41% 59.88% 76.65% 73.20% 91.98%
2010 17.95% 16.35% 14.84% 24.40% 25.50% 28.62% 30.01% 27.22% 30.42%
2011 -24.62% -24.74% -18.56% -15.45% -17.54% -13.50% -9.99% -11.88% -14.50%
2012 27.70% 30.40% 38.88% 30.75% 25.59% 32.82% 32.15% 33.48% 28.27%
2013 6.76% 8.78% 9.29% 6.55% -2.00% 14.74% 13.45% 13.53% 11.77%
2014 31.39% 37.17% 50.38% 40.86% 35.99% 46.56% 43.66% 41.11% 34.67%
2015 -4.06% 6.80% 16.90% 11.66% -7.68% 13.42% 7.54% 10.25% 9.21%
2016 3.01% -6.75% 19.72% 1.83% 6.11% 8.02% -2.26% 4.96% 4.15%
Exhibit 6: Calendar year wise returns delivered by Single and Multi-factor indices

 Though few single factor index strategies outperformed traditional market capitalization weighted
index strategies for most of the years, risk of cyclicality in single-factors indices is noteworthy. By
having stocks based on combination of 2 or more factors, multi-factor index strategies exhibit lower
performance swings. For instance, during the downturn of 2008, Alpha portfolio fell by 66.96% whereas
NIFTY Alpha Quality Low-Volatility 30 fell only by 43.93%, reducing the dip by over 23%.
Similarly during 2016, Low-Volatility portfolio gave returns of 1.83% whereas NIFTY Alpha Low-
Volatility gave returns of 8.02%.
  Multi-factor index strategies can enable investors to diversify their factor-risk exposures and counter
the cyclicality of various single-factors. A strategy of combination of quality, value, alpha and low
volatility factors (read NIFTY Alpha Quality Value Low-Volatility 30) has given less variability in
returns throughout the analysis period. A slightly aggressive strategy of mixing Alpha with other factors
(read NIFTY Alpha Quality Low-Volatility & NIFTY Alpha Low-Volatility) remained the best
performing index strategies.

Multi-Factor indices outperformtraditionalindices consistentlyover longperiods

NIFTY Alpha Low Vol 30

NIFTY Quality Low Vol 30

8000

6000

4000

2000

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16

Note: Performance of all indices is compared w.r.t inception date April 1, 2005
Exhibit 7: All NIFTY multi-factor indices outperformed market cap based indices over long term

Market capitalization based indices 2 Factor Indices 3 Factor Indices 4 Factor Indices
Period
NIFTY Alpha NIFTY Alpha
NIFTY Alpha NIFTY Quality
NIFTY NIFTY NIFTY Quality Low- Quality Value
CAGR Low-Volatility Low-Volatility
100 200 50 Volatility Low-Volatility
30 30
30 30
Since Apr
13.83% 13.25% 13.47% 20.33% 17.61% 18.69% 16.12%
2005
10 years 9.01% 8.59% 8.40% 15.81% 13.75% 14.81% 13.45%
7 years 10.09% 9.90% 9.53% 19.28% 15.55% 17.36% 14.30%
5 years 15.49% 15.77% 14.33% 24.48% 17.98% 20.95% 18.08%
3 years 11.33% 11.98% 9.9% 25.72% 15.54% 21.68% 17.04%
1 year 20.05% 21.23% 17.91% 25.55% 10.34% 21.57% 19.62%
6 Month 17.05% 17.34% 16.98% 17.67% 11.53% 14.35% 11.93%
Exhibit 8: Performance comparison of market capitalization and multi-factor based indices
Empirical evidence of back-tested Multi-Factor indices over long time horizons further strengthens the
hypothesis that multi-factors index strategies deliver long term risk premium over traditional market
capitalization based index strategies. As on May 31, 2017, all multi-factor indices have outperformed
NIFTY 50 index by a significant margin. Two-factor index - NIFTY Alpha Low-Volatility 30 was the best
performing index outperforming NIFTY 50 by 6.86 % per annum (since Apr 2005). 3 factor index - NIFTY
Alpha Quality Low-Volatility 30 outperformed NIFTY 50 by 5.22% per annum (since April 2005). While
for more recent shorter time horizons (1 year or 6 months), NIFTY 50 has outperformed few multi-factor
indices. Historical evidence of multi-factor indices outperforming the traditional counterpart over longer
time period further emphasizes the importance of long term holding period reminiscent of funds with
longer investment horizon.
 NIFTY Quality Low-Volatility 30
Annualized returns (%)

20.00%

0.00%

Exhibit 9: Factor indices performed better on risk-return basis vis-a-vis market cap weighted indices during April 2005 - May 2017 period

Exhibit 9 above plots the since inception return and risk for each of the market capitalization based and
multifactor indices. As can be seen, all the multi-factor indices plot on the upper-left quadrant which
depicts lower risk - higher return profile as compared to NIFTY 50

Period Market capitalization based 2 Factor 3 Factor Indices 4 Factor

indices
NIFTY Alpha NIFTY Quality NIFTY Alpha NIFTY Alpha
Return to Risk NIFTY NIFTY NIFTY
Low-Volatility Low-Volatility Quality Low- Quality Value
ratio 100 200 50
30 30 Volatility 30 Low-Volatility 30
Since Inception 0.59 0.58 0.58 1.08 1.02 1.03 0.87
10 years 0.38 0.37 0.36 0.86 0.83 0.85 0.75
7 years 0.63 0.62 0.59 1.56 1.30 1.40 1.13
5 years 1.04 1.05 0.96 2.00 1.52 1.70 1.44
3 years 0.78 0.81 0.70 1.95 1.28 1.64 1.27
1 year 1.70 1.75 1.56 2.09 1.01 1.79 1.68
Exhibit 10: ‘Return to Risk’ ratio of various indices

Exhibit 10 above shows the ratio of return to standard deviation (risk) for each index. Return to Risk ratio
of multi-factor indices has been in the range of 0.87 to 1.08 since inception, as compared to
approximately 0.58 of market cap weighted indices, highlighting the fact that multi-factor indices have
historically given higher returns per unit of risk undertaken by the investor.
Multiple-factor index strategies result in more sector-diversified portfolios

3.92
3.08
% WEIGHT OF SECTOR CONTRIBUTION

30 30 Volatility 30 Volatility Value30

FINANCIAL SERVICES ENERGY IT AUTOMOBILE

CONSUMER GOODS Others PHARMA CONSTRUCTION
METALS CHEMICALS INDUSTRIAL MANUFACTURING

Exhibit 11: Multi-Factor indices sector composition relative to NIFTY 50

Exhibit 11 above shows the sector exposure of NIFTY 50 and each of the multi-factor indices. NIFTY 50
has highest sector exposure towards financial services, IT and energy. In comparision, NIFTY multi-factor
indices witness exposure to different set of sectors (relatively higher towards consumer goods & pharma
and relatively lower towards financial services).
Combining factors also helps create a portfolio with exposure to more sectors. For instance, the portfolio
of Quality factor portfolio has been traditional heavy on IT, consumer goods, pharma and automobile
sectors whereas Low-Volatility factor portfolio has been more concentrated on consumer goods, energy
and financial services. Multi-factor index combining Quality and Low-Volatility (read NIFTY Quality Low-
Volatility Index) thus has exposure to the combined set of sectors. Lower concentration of weights in
these specific sectors makes it less prone to concentration risks during periods of market stress/sectoral
underperformance.
 All singular instances of share changes arising out of additional issue of capital, such as ESOPs,
QIPs, ADR/GDR issues, private placements, warrant conversions, and FCCB conversions,
which have an impact of 5% or more on the issued share capital of the security are implemented
after providing a five working days’ prior notice. Share repurchase (buyback) also have the
same rules as applicable to share changes.

Changes entailing less than 5% impact on the issued share capital or a free-float are
accumulated and implemented from the first working day after F&O expiry of March, June,
September and December after providing five working days’ prior notice.

At the time of every rebalancing that is resulted on account of change in the index constituents,
change in equity, changes in IWFs and payment of special dividend (defined under Total Return
(TR) Index Calculation section), weights of each scrip are realigned to maximum capping level
(in case of capped indices) by making a suitable divisor adjustment.

Currency of Calculation

For calculation of the index, all prices in Indian rupees are considered

NSE INDICES TYPES:

NIFTY100 ESG Index
NIFTY100 Enhanced ESG Index
NIFTY SME EMERGE Index
Nifty Commodities Index
Nifty CPSE Index
Nifty Corporate Group Indices
Nifty Energy Index
Nifty India Consumption Index
Nifty Infrastructure Index
Nifty MNC Index
Nifty PSE Index
Nifty Services Sector Index
Nifty100 Liquid 15 Index
Nifty Midcap Liquid 15 Index
Nifty Shariah 25 Index
Nifty50 Shariah

Index Dissemination

Tickers

Index Bloomberg Reuters

NIFTY Auto NSEAUTO .NIFTYAUTO
NIFTY Bank NSEBANK .NSEBANK
NIFTY Financial Services NSEFIN .NIFTYFIN
NIFTY FMCG NSEFMCG .NIFTYFMCG
NIFTY IT NSEIT .NIFTYIT
NIFTY Media NSEMED .NIFTYMED
NIFTY Metal NSEMET .NIFTYMET
NIFTY Pharma NSEPHRM .NIPHARM
NIFTY Private Bank NSEPBANK .NIFPVTBNK
NIFTY PSU Bank NSEPSBK .NIFTYPSU
NIFTY Realty NSEREAL .NIFTYREAL

1.3 OBJECTIVES OF THE STUDY

This study consists of following objectives:

1. The primary objective of this study is to analyze the risk and return of selected sectoral indices from
NSE.
2. To compare the sectoral indices with the market index.
3. To examine the correlation between sectoral NSE indices and market indices.
4.To identify whether there is a difference in risk factors across the sectoral indices.
5. To find out if there is any difference in the risk factors among various NSE time intervals.

CHAPTER-2
2.1 REVIEW OF LITERATURE

Shanmugasundaram and Benedict (2013) studied the risk factor of NSE sectoral indices by selecting
five NSE sectors (Auto, Bank, FMCG, IT and Infrastructure). P.Swarna Laxmi (2013) studied the
volatility of sectoral indices with 11 sectoral indices where the performances of 11 sectors are compared
with market index. Srivatsava (2012) studied the analysis of sectoral indices of BSE with 11 sectors for
the period of 2003 to 2012.

S. K. Santi Swarup, Ambika Verma (1998) 4 examined the important stock exchange reforms during
the period 1992-1997 and their impact on capital market development as perceived by intermediaries. A
sample of 30 brokers from Delhi was selected and their perceptions were studied using questionnaires
and informal interviews. Thus, Indian capital market has several positive developments during the period
of reform but attaining international standard is still a dream. The infrastructure for settlement and
transfer of traded securities has yet to touch global standards. Liquidity has been major problem in the
stock market and also is acting as a damper to the investments, regulations and surveillance need to be
made more comprehensive. The Indian regulatory framework needs to shift its focus from corrective to
prevention stage.

R. P. Hooda (1998)5 analysed investor’s behaviour in stock market. It is found that majority of investors
follow the mixed approach, safe reasonable return combined with speculative benefits. The composition
of investment in term of the amount held in different security alternatives is characterized byhighest
share of investment in fixed deposits, with equity shares being very close by. Performance shares are the
least preferred among different security alternatives accounting for extremely low proportion of
investment. Occupation wise, agriculturists prefer to invest more with the banks. Those engaged in
services hold the highest share of their investment in fixed deposits with government undertakings.
Professional having no fixed deposits with government undertakings. It is found that good track record
as to profitability and dividend payment is the most important factor, which greatly affects the
investment making process by the investors.

This is a very recent issue still researcher has done lot of study on different perspectives of this
macroeconomic event. Here is the glimpse of few research works which has covered all the related
dimensions of above stated event.

Sinha Dr. Ambalika & Rai Divya (November11, 2016) has written an article “Aftermath of
Demonetization on Rural Population”. This paper has covered consequences of demonetization on rural
people & unorganized sector. Authors focus on this segment because this segment uses minimum
cashless transactions.

National Institute of Public Finance & Policy on November 14, 2016 by tax research team, no. 182 has
written a research paper on the topic “Demonetization : Impact on the Economy”. In this paper they have
mention impact of cashless economy on organize & unorganized sector of our economy. They further
studied this impact in short, medium & long term. There is a survey made on citizens banking &
shopping habits. On the basis of this survey conclusion are drawn regarding benefits of demonetization

Philip Maiyo, Subhash Chander (2001)8 examined the theory of random walk in stock prices with
special reference to non-specified shares listed on Bombay Stock Exchange. The analysis has been made
using daily data of stock prices during the period of 1-1-1996 to 30-11-2000. It concluded that, the non-
specific shares listed on the Bombay Stock Exchange and market indices follow the random walk
hypothesis and hence the previous share prices does not apparently influence future prices.
This study also suggests that, the disclosure and corporate government norms need to be
continuously upgraded to give the transparency to the investors. Delayed regulatory actions against the
unscrupulous brokers should have to be made quickly. To arrest the volatility of stock market there is
need to develop appropriate regulatory and legislative framework to curb the speculative activities of
both domestic and foreign investors. Also, there is need to foster the investor confidence by making the
market more 'news oriented' rather than 'noise driven.'

L. M. Bhole, Shreeya Pattanaik (2002) discussed the working of Indian stock market from both
quantitative and qualitative perspectives so as to find out how far the goal of liberalization policy has
been achieved. It is concluded that, the investment pattern on the market has undergone a change, the
genuine, long term, retail, small, individual investors have largely deserted the market and the
institutional investors now account for a major part of investments, FIIs have come to dominate the
market. Study suggested that, the conscious efforts and suitable policy measures need to be undertaken to
make investment in equities a fairly long-term investment. Th

Mohd Javaid (2002)10 studied the operations of trading in stock exchanges. It considered both the
brokers and investors of primary and secondary market in Delhi. The study concludes that changes in
management of the stock exchanges are required for bringing efficiency to the operation of the stock
exchanges. Demutualization is the best suitable solution to keep management free from the broker’s
inference. There is need of statutory committee in each stock exchanges of India like disciplinary action
committee, defaults committee and arbitration committee. There should be a separate body for the stock
exchanges and strict implementation of rules and regulation, which have been imposed by SEBI on the
brokers. National Clearing Corporation would be an important step towards improvement in market
situation in Indian stock market. This study also suggests the need of specification for consumer
protection and there should be integration of banking sector with stock markets. Also, it suggests central
information system for development of stock market.

Renu Gupta (2002)11 studied performance of National Stock Exchange with a view to evaluate the role
of NSE in the development of capital market. This research work also covers role of NSE to protect
investors, volatility and liquidity of NSE. It is concluded that the market surveillance is necessary for
ensuring the market integrity. Comparative study of NSE and BSE showed that NSE displace BSE to
second position on the basis of turnover within the first year of its operation i.e. in 1995-96. The ratio of
turnover to market capitalization was higher in NSE as compared to BSE. However, the market
capitalization of BSE was generally higher than that NSE.

Harvinder Kaur (2002)12 in her study measures the extin her study measures the extent of volatility of
Indian stock market and its behaviour over different period and over different stocks. This study also
examines the impact of foreign institutional investment
R. Venkatesh, Ms. Purba Basu (2004)16 examined the structural and operational changes of the
securities market such as introduction of T+2 rolling settlement, online trading system and
demutualization of stocks. It also examined activities of central listing authority and growth of mutual
fund industry in India. It concludes investors now can take conscious decision regarding the trade in
derivative market. However, it is needs to be done to increase the confidence and information base of the
investors to curb market manipulation.

Kamakshya Prasad Prusti (2004)17 studied the demutualization of stock exchanges. Demutualization
is a process of changing the corporate structure of an exchange to the status of a limited liability or
corporation. It is an attempt to segregate ownership of the exchange from the membership of the
exchanges. Exchanges have recognised the need for being competitive by substantially bringing down
their cost of operation and being technologically efficient even at the peak of a storm. Thus, operating at
the

Gupta (1972) in his book has studied the working of stock exchanges in India and has given a number of
suggestions to improve its working. The study highlights the' need to regulate the volume of speculation
so as to serve the needs of liquidity and price continuity. It suggests the enlistment of corporate securities
in more than one stock exchange at the same time to improve liquidity. The study also wishes the cost of
issues to be low, in order to protect small investors

Panda (1980) has studied the role of stock exchanges in India before and after independence. The study
reveals that listed stocks covered four-fifths of the joint stock sector companies. Investment in securities
was no longer the monopoly of any particular class or of a small group of people. It attracted the
attention of a large number of small and middle class individuals. It was observed that a large proportion
of savings went in the first instance into purchase of securities already issued.

Gupta (1981) in an extensive study titled `Return on New Equity Issues' states that the investment
performance of new issues of equity shares, especially those of new companies, deserves separate
analysis. The factor significantly influencing the rate of return on new issues to the original buyers is the
`fixed price' at which they are issued. The return on equities includes dividends and capital appreciation.
This study presents sound estimates of rates of return on equities, and examines the variability of such
returns over time.
Jawahar Lal (1992) presents a profile of Indian investors and evaluates their investment decisions. He
made an effort to study their familiarity with, and comprehension of financial information, and the extent
to which this is put to use. The information that the companies provide generally fails to meet the needs
of a variety of individual investors and there is a general impression that the company's Annual Report
and other statements are not well received by them

L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in the
Indian stock market. The over speculative character of the Indian stock market is reflected in extremely
high concentration of the market activity in a handful of shares to the neglect of the remaining shares and
absolutely high trading velocities of the speculative counters. He opined that, short- term speculation, if
excessive, could lead to "artificial price". An artificial price is one which is not justified by prospective
earnings, dividends, financial strength and assets or which is brought about by speculators through
rumours, manipulations, etc. He concluded that such artificial prices are bound to crash sometime or
other as history has repeated and proved.

Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and also for selling
shares. He advised the investors to buy shares of a growing company of a growing industry. Buy shares
by diversifying in a number of growth companies operating in a different but equally fast growing sector
of the economy. He suggested selling the shares the moment company has or almost reached the peak of
its growth. Also, sell the shares the moment you realise you have made a mistake in the initial selection
of the shares. The only option to decide when to buy and sell high priced shares is to identify the
individual merit or demerit of each of the shares in the portfolio and arrive at a decision.

Pyare Lal Singh (1993) in the study titled, Indian Capital Market - A Functional Analysis, depicts the
primary market as a perennial source of supply of funds. It mobilises the savings from the different
sectors of the economy like households, public and private corporate sectors. The number of investors
increased from 20 lakhs in 1980 to 150 lakhs in 1990 (7. 5 times). In financing of the project costs of the
companies with different sources of financing, the contribution of the securities has risen from 35.01% in
1981 to 52.94% in 1989. In the total volume of the securities issued, the contribution of debentures /
bonds in recent years has increased significantly from 16. 21% to 30.14%.

Sunil Damodar (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for short-term risk
control. He opined that derivatives have become an indispensable tool for finance managers whose prime
objective is to manage or reduce the risk inherent in their portfolios. He disclosed that the over-riding
feature of 'financial futures' in risk management is that these instruments tend to be most valuable when
risk control is needed for a short- term, i.e., for a year or less. They tend to be cheapest and easily
available for protecting against or benefiting from short term price. Their low execution costs also make
them very suitable for frequent and short term trading to manage risk, more effectively.

R.Venkataramani (l994) disclosed the uses and dangers of derivatives. The derivative products can lead
us to a dangerous position if its full implications are not clearly understood. Being off balance sheet in
nature, more and more derivative products are traded than the cash market products and they suffer
heavily due to their sensitive nature. He brought to the notice of the investors the 'Over the counter
product' (OTC) which are traded across the counters of a bank. OTC products (e.g. Options and futures)
are tailor made for the particular need of a customer and serve as a perfect hedge. He emphasised the use
of futures as an instrument of hedge, for it is of low cost.

Chapter 3
Data Analysis and Interpretation

Price Index Calculations:

The index is calculated using free float market capitalization methodology. At the time of
rebalancing of shares/ change in index constituents/ change in investable weight factors (IWFs),
the weightage of the index constituents (where applicable) are capped at applicable levels.
Weightage of such stock may increase between the rebalancing periods.
Index Market Capitalization = Total shares outstanding * Price * IWF * Capping Factor (if
applicable)

PR Index Value =

Index market capitalization/ Base Market Capital * Base Index Value

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

Total Return (TR) Index Calculation:

The index reflects the return one would get if an investment is made in the index portfolio. As
the index is computed online, it takes into account only the stock price movements. However,
the price indices do not consider the return from dividend payments of index constituent stocks.
Only the capital gains and losses due to price movement are measured by the price index. In
order to get a true picture of returns, the dividends received from the index constituent stocks
also need to be included in the index movement. Such an index, which includes the dividends
received, is called the total return index. The total return index reflects the returns on the index
from stock prices fluctuation plus dividend payments by constituent index stocks.

The total return version of the index is also available, which assumes dividends are reinvested
in the index after the close on the ex-date. Corporate actions like dividend announcement do
not require any adjustment in the normal price index (other than special dividend). Special
dividend refers to a dividend that’s more than 5% of close price of a stock declaring dividend
and all cases of dividends (irrespective of the dividend amount), where the listed entity has
sought exemption from the timeline prescribed under the provisions of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015. A suitable divisor adjustment is
made in case of a special dividend.

A separate Total Returns Index (TR) is calculated which shows the returns on Index portfolio,
inclusive of dividends.
Calculation of the TR Index:

(𝑇𝑜𝑑𝑎𝑦′𝑠 𝑃𝑅 𝐼𝑛𝑑𝑒𝑥 + 𝐼𝑛𝑑𝑒𝑥𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑)

𝑻𝑹 𝑰𝒏𝒅𝒆𝒙 = 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑇𝑅 𝑖𝑛𝑑𝑒𝑥 ∗ [1 + (
− 1) ]
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑃𝑅 𝐼𝑛𝑑𝑒𝑥

Where,
Index dividend for the ‘T’ day = Total Dividends of the scrips in the Index/ Index
divisor for the day

Total dividends of scrips in the Index = Σ (Dividend per share * Modified index
shares)

Modified index shares = Total shares outstanding * IWF * Capping Factor (if
applicable)
Investible Weight Factors (IWFs):
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 from March, June, September and December effective after the expiry of the
F&O contracts. The following categories are excluded from the free float factor computation:

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

Example: 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. = 0.61
Multi-Factor indices have firm academic grounding

The genesis of multi-factor based investing has been in existence since Fama-French (1992-93)
developed their influential three and four factor model incorporating size, value, quality and momentum
to explain risk-return characteristics. Futher, subsequent work by Ross [Arbitrage Pricing Theory, 1976]
proposed that stock returns can be modeled as function of various other factors (fundamental,
macroeconomic or statistical) with market risk (Beta) being most important one but not the only factor
determining returns of the stock. Reasons for long term risk premium earned by the factors have also
been explained by factors that have ‘systematic risk’ attached to them (for instance factors like value,
size and momentum have high dependence on macro-economic factors like growth, inflation, capital
inflows, etc) and behavioral biases like overreaction, overconfidence, loss aversion, etc.