How Do Companies Get Included in the Nifty 50?

Nifty 50 is a 50-stock index compiled by the National Stock Exchange. It is one of the important benchmarks of Indian stock market index. Fund houses use it for index funds, exchange-traded funds, derivatives and portfolio comparison.

A company doesn’t automatically get into the Nifty 50 if the share price rises. NSE Indices Limited has prescribed rules on eligibility, trading activity, liquidity and free-float market value.

Step 1: Join the Eligible Pool

The first screen is the Nifty 100. A company must be a part of Nifty 100 including announced changes which are yet to be effective.

The company’s shares should also be available for trading in the NSE Futures and Options segment. Shares with different voting rights may qualify if they meet the stated DVR rules.

Step 2: Keep Trading at Full Speed

The shares of the company should have traded 100% of the time in the past six months. Put simply, the stock should have been traded on each market day during the review period.

Step 3: Pass the liquidity test

NSE Indices uses impact cost to measure liquidity. It indicates the difference between the ideal market price and the price at which a certain trade is feasible.

For Nifty 50 entry, stock should have an average impact cost not exceeding 0.50% in the last six months. For a portfolio of ₹10 crore, it has to meet this level for 90% of the observations.

This test is used to determine if a trade of the size specified can be made without a significant move in price. Funds linked to stock market indices may be required to buy or sell shares when the weightings of an index change.

Step 4: Follow the Free-Float Market Value Rule

The Nifty 50 is based on free-float market capitalisation. Free float is the shares that are available for trading in public. Excludes promoter holding and some locked-in holdings.

In order to qualify for the index, the company must have a six-month average free-float market capitalisation of at least 1.5 times the market capitalisation of the company at the bottom of the index ranking in the same industry.

For example, let us assume that the free-float value of the constituent is ₹40,000 crore on an average. Under this test, a new eligible stock would require ₹60,000 crore. This example is not a forecast of an index, but an explanation of the formula.

Step 5: Wait for the review to be scheduled

The Nifty 50 is reviewed semi-annually on the basis of data for the periods ending in January and July. Changes approved take effect the last trading day of March and September.

Market participants are informed of replacements four weeks in advance. Up to five companies can be added during the scheduled reviews in one calendar year.

But this is not the case in some instances. A stock may be removed outside the normal cycle on account of merger, demerger, delisting, suspension, loss of F&O eligibility, move to BZ series, capital restructuring or adverse regulatory order.

How Does a Company Get Its Weight?

Not all companies have the same index weight in the entry. The weights of Nifty 50 are based on the free-float market capitalisation. A company can increase its public market value and its weight.

Prices, shares and corporate actions may cause weights to change. NSE Indices takes an adjustment in the calculation so that the stock splits or rights issue do not create an artificial jump in the index.

How to Use Bajaj Broking for Nifty 50 Research

Bajaj Broking’s Nifty 50 page gives readers the index level, list of constituent stocks, charts, price moves and other related market data. This allows readers to follow the companies that make up the index, after learning how selection works.

Market research and index tracking can be aided by Bajaj Broking. Inclusion rules shall continue to adhere to the official methodology of NSE Indices. Just being part of the index doesn’t tell if a stock fits a person’s goals, timeframe or risk.

Conclusion

Companies are added to the Nifty 50 through a rule-based review. They need to be a part of the Nifty 100, trade in the F&O segment, have complete trading frequency, pass the liquidity test and satisfy the free-float market value rule.

Reviews are twice a year, but corporate or regulatory events can cause changes at other times. These rules allow the Nifty 50 to act as a defined benchmark for India’s stock market indices.