NMDC and IndusInd Bank will replace Wipro and Siemens in the 50-share Nifty benchmark with effect from April 1. The Nifty, the benchmark index of the National Stock Exchange, comprises 50 stocks that represent 22 different sectors of the economy and is widely tracked by fund managers across the globe. Every six months, the constituents of the Nifty are reviewed, leading to replacement of some stocks. A maximum of 10 per cent of the index size may be changed in a calendar year.
Here are the criteria for a stock to be included in, or excluded from, the index
- Liquidity: This is measured by the market impact cost of a stock. Ideally, a stock should be traded at its ruling market price but, practically, traders have to pay over the initial price due to market fluctuations. The higher the impact cost, the bigger the transaction cost. For a stock to qualify for possible inclusion into the 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, for the basket size of Rs 2 crore.
- Free float: It is a measure of the shares that are readily available for trading. For a company to qualify for the NSE index, it should have an investable weight factor (IWF) of at least 10 per cent. Floating stock means stocks which are not held by a company's promoters or associated entities.
- Market capitalisation: A stock is eligible for inclusion in the Nifty if its six-month average market capitalisation has been Rs 500 crore or more in the last six months.
- Listing criterion: A company should have a listing history of six months for inclusion. However, a company that has freshly listed can also be considered for inclusion if it fulfills the first three criteria for the index over a three-month period.
- Replacement: A Nifty stock can be replaced if the stock with the highest market cap in the replacement pool has at least twice the market cap of the index stock with the lowest market capitalization. A stock might be excluded because of corporate actions, delisting, etc. In such a scenario, the stock having the largest market cap, provided the eligibility criteria are met, will be considered for inclusion.