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Tuesday, May 4, 2010

Sensex Evolution Story: A Barometer of Indian Equity Market

Sensex has multiplied 32 times since its debut 24 years ago.

Sensex: A Barometer of Indian Equity Market

A major milestone in the Indian stock market ws the launching of the BSE Sensitive Index on the January 2, 1986. Making a humble beginning of 549 points on the first day, this 30 stock index has acquired great significance and has truly become the barometer of the Indian stock market today.

Prior to Sensex there was on benchmark to help investors track the movement of the Indian stock market. Sensex has not only helped Indian investors gauge the growth of the market, but also helped global investors to taste the flavour of the Indian growth story. Such is Sensex's hold on the investor's mind that even after establishment of NSE in 1994, it is the sensex which has a better recall value than the NSE's Nifty.

Consisting of the 30 pivotals, the Sensex has 1979 as its base year. Each of these stocks has weightage directly proportional to its free float market capitalization, which effectively means that the companies with largest free float market capitalization get higher weightage than those with the comparatively lower capitalization. However, when Sensex was launched weightage was given based on full market cap. To be a part of the Sensex, there are certain quantitative and qualitative parameters such as market cap, liquidity, frequency in trading, industry representation, listing history and track record of the company etc. Only companies which stand the test of these parameters find a place in sensex.

What is more significant about the Sensex is that it was designed in such a way that the companies represented in the index are leaders in their respective sectors. Thus while some sectors have continued to reign and are represented in the index, the benchmark has also accommodated various emerging and high growth sectors such as IT, financial services and telecom. And who would forget the entry of the real estate sector with the entry of the real estate big dady DLF in the sensex after it displaced Dr. Reddy's from the list.

But Sensex has changed over the years with just eight companies still continuing to be part of the Sensex since inception. Interestingly, there were companies to be part of the Sensex original's list., but failed to make it to the list when the Sensex debuted in January 1986. These companies were Bombay Burmah, Asian Cables, Crompton Greaves and Scindia. Also there were two companies, namely L&T and Tata Power, which made temporary exits, but made their way back into the Sensex, while others in the pack gave way to new entrants.

The Sensex is much more dynamic today than it was previously as it represents a wider spectrum of the economy. Though the market has turned more volatile on account of global factors, we feel it is these high growth companies in the pack that would help the Sensex take a giant leap in the coming years.