How Does the NSE select stocks to be included in the S&P CNX Nifty?

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oi-Sunil

By Sunil Fernandes

Published: Tuesday, December 30, 2014, 13:14 [IST]

It's never an easy proposition to include and exclude stocks from the indices. In India the S&P CNX Nifty has become an important gauge for reflecting how the stock markets are performing. Along with the BSE Sensex it is the most important benchmark for the stock market in India.

But, the question always arises as to how stocks are included in the index. The S&P CNX NSE Nifty is managed by a team at IISL. There is a three-tier governance structure comprising the Board of Directors of IISL, the Index Policy Committee, and the Index Maintenance Sub-Committee.

Under these the S&P CNX Nifty is managed and steps are taken that the 50 best companies based on various parameters are selected.
How are stock selected?

The team at IISL looks at the following:

a) Market impact cost
Market impact is one the important parameters based on the liquidity of a stock. For a company to be considered for inclusion in the CNX Nifty, it should have traded at an average impact cost of 0.50 per cent or less during the last six months for 90 per cent of the observations.

b) The company should have at least a 10 per cent investable weight factor.

c) The company should have been listed in the past six months to be considered as a Nifty constituent.

d) A company which comes out with an IPO will be considered in three months time, provided that it fulfils other criteria.

Conclusion

The S&P CNX Nifty has become one of the most important benchmarks for knowing where the stock markets in the country are headed. The IISL follows a very sound strategy in determining which companies should be shunted out and which companies should be included in the Nifty.

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