Manish Desai writes: The Bombay Stock Exchange (BSE) Sensex, the barometer of India’s stock market fortunes, has entered its silver jubilee year. It was launched on January 2, 1986 with 30 most actively traded stocks of that period, with 1979 as the base year. Today, the 30 stocks on the BSE Sensex, account for around 1/5th of the market capitalization of the Bombay Stock Exchange
There are more than 4,700 companies listed on the BSE, making it the biggest stock exchange in the world on the basis of number of listed companies. But not all stocks are actively traded. Even fewer are significant pointers of the trends in the market and the economy.
At the launch of the Sensex, the Bombay Stock Exchange had said that “the absence of an index number of equity prices to reflect the general trend of the market was felt for a long time by investors and also by newspapers who do not compile their own index numbers”.
What is Sensex?
The Sensex is a value-weighted index and is calculated based on a free-float capitalization method. This is a variation from the earlier market capitalization method, as instead of using a company’s all outstanding shares, only the shares that are readily available for trading are used. The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government and institutional investors. This method was introduced w.e.f September 1, 2003, to serve as a true indicator of market sentiments.
The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement ofscrips etc.
From its early days in 1986, the Sensex has traveled a long way and has increased by nearly 35 times to the present. On the first day of trading on April 1, 1986, the Sensex had closed at 549.43. It opened its silver jubilee year trading at 17,467.
Composition of the Sensex
The composition of the index too has undergone change many times as only 11 of the original 30 companies continue to be part of the Sensex.
In 1986, Sensex comprised – ACC, Bombay Dyeing, Ballarpur Industries, Ceat Tyres, Century Spinning, Food Specialities (now Nestle), Great Eastern Shipping, GSFC, Glaxo,Gwalior Rayon (now Grasim), Hindustan Aluminium (now Hindalco), Hindustan Lever,(now Hindustan Unilever) Hindustan Motors, Indian Hotels, Indian Rayon, ITC, Kirloskar Cummins, Larsen & Toubro, Mahindra & Mahindra, Mukand, Pieco Electronics (now Philips), Premier Automobile, Reliance Industries, Siemens, TELCO (now Tata Motors), Tata Power, TataSteel, Voltas, Zenith.
The present composition comprises ACC, BHEL, Bharti-Airtel, DLF, Grasim, HDFC, HDFC Bank, Hero-Honda, Hindalco, Hindustan Unilever, ICICI Bank, Infosys, ITC, JaiprakahsAssociates, Larsen & Toubro, Mahindra & Mahindra, Maruti Udyog, NTPC, ONGC, Reliance Communications, Reliance Industries, Reliance Infrastructure, State Bank of India, SterliteIndustries, Sun Pharma, TCS, Tata Motors, Tata Power, Tata Steel, Wipro.
The changed composition in itself narrates the new dimension acquired by the Indian corporate sector. India’s pre-eminence in the IT world is highlighted by the presence of its big three IT-ITES companies – TCS, Infosys and Wipro. There are five Public Sector entrants, unlocking the hidden opportunities thanks to the policy of disinvestment. While presence of three Reliance companies reflect on corporate splits, the inclusion of Bharti-Airtel, DLF,Jaiprakash Associates and Sterlite signify the arrival of new corporate giants. Making way for the new entrants are the bigwigs of the yester years – viz : Bombay Dyeing, Century, Hindustan Motors, Premier Automobiles , Great Eastern Shipping etc. A cursory look at the Sensex companies of the past and the present clearly defines the sun-rise and sun-set sectors of the Indian economy. The new composition also indicates the decline of over-bearing presence of Mumbai headquartered companies, which accounted for over 75 per cent in 1986.
SENSEX Over the Years
It took more than two years for the Sensex to cross the four digit mark. On July 25, 1990 the Sensex for the first time closed at 1001 points. It began to pick up momentum, with a slew of economic liberalization measures announced in 1991 by Dr. Manmohan Singh, the then Finance Minister of India. A market friendly budget of 1992-93 and expectations from a liberal import-export policy helped Sensex surge past 4,000 mark by March 1992, before theHarshad Mehta scam hit the market. Y2K coincided with the information technology boom, and the Sensex crossed 6000 in the year 2000. Around 2005, Foreign Institutional Investors became active on the stock market and the Sensex crossed the 8,000 mark on September 8, 2005. February 7, 2006 was a golden letter day for the Bombay Sensex, as it crossed the 10,000 mark and closed marginally above. Little more than a year later, Sensex doubled again and breached the 20,000 mark on October 29, 2007. It touched 21,078 on January 8, 2008. Then the signs of global recession began to surface and the US sub-prime crisis hit the market hard, when several Foreign Institutional Investors began off-loading their holdings. It has now begun to stage a comeback.
Importance of Indices
It is often stated that the stock market indices play an important role in gauging the economic health and progress of a country. It all began with the construction of Dow Jones Transportation Average in 1884. Today, across the world we have several stock market indices. Notable among them being – the S & P Global, Dow Jones, FTSE, Hang Seng and Nikkei. Despite their overwhelming popularity with the investors, they have also been targets of criticism on many counts. There are plenty of incidences of rigging, corporate corruption, artificially over-valued stocks, conflict of interest of research firms, which cause volatility in stock markets and dent the images of indices as ‘true and fair’ reflectors of company’s health.
Yet, Stock Markets and their indices continue be important. Stock markets provide the much needed liquidity in the economy. The two stock market indices from India, the BSE Sensex and NIFTY have helped put the Indian Capital markets on the world map. The growing presence of Foreign Institutional Investors is integrating our markets with the global markets. Let the march continue.