Financial Markets and Security Analysis Study of BSE-BANKEX INDEX

Ankit Shah PGDM 09-11 (Finance) Roll No. 139 BSE BANKEX Index Bombay Stock Exchange Limited launched "BSE BANKEX Index" on 23 June 2003. This index consists of major Public and Private Sector Banks listed on BSE. The BSE B ANKEX Index is displayed on-line on the BOLT trading terminals nationwide. Objective: a. An Index to track the performance of listed equity of Banks. b. A suitable benchmark for the Central Government to monitor its wealth on the bourses. Features: A few important features of the BANKEX are given below: BANKEX tracks the performance of the leading banking sector stocks listed on the BSE BANKEX is based on the free-float methodology of index construction The base date for BANKEX is 1st January 2002. The base value for BANKEX is 1000 points BSE has calculated the historical index values of BANKEX since 1st January 2002. 14 stocks which represent 90 percent of the total market capitalization of all b anking sector stocks listed on BSE are included in the Index The Index is disseminated on a real-time basis through BSE Online Trading (BOLT) terminals. Stocks forming part of the BANKEX along with the particulars of their free-float adjusted market capitalization are listed below. Script Selection Criteria for BSE BANKEX : Eligible Universe Scripts classified under the banking sector that are present constituents of BSE -500 index form the eligible universe. Trading Frequency Scripts should have a minimum trading frequency of 90% in preceding three months . Market capitalization Scripts with minimum market capitalization coverage of 90% in banking sector bas ed on free-float final rank form the index. Buffers Buffer of 2% both for inclusion and exclusion in the index is considered so that movements in and out of the index are minimized. For example, a company can be

included in the index only if it falls within 88% coverage and an existing index constituent cannot be excluded unless it falls above 92% coverage. However, the above buffer criterion is applied only after the minimum 90% market coverage is satisfied. SENSEX Constituents (Composition revised from 13 Oct 2010) Last updated on Wednesday, October 13, 2010 Scrip Code Company Close Price Full Mkt. Cap. (Rs. crore) Free-Float Adj. Factor Free-Float Mkt. (Rs. crore) Weight in Index (%) 532174 ICICI BANK L 1,160.10 133,132.65 1.00 133,132.65 500112 STATE BANK O 3,304.90 209,860.53 0.45 94,437.24 500180 HDFC BANK LT 2,441.40 112,940.35 0.80 90,352.28 532215 AXIS BANK 1,588.70 64,952.60 0.65 42,219.19 532461 PUNJAB NATBK 1,349.10 42,537.46 0.45 19,141.86 500247 KOTAK BANK 520.20 38,125.77 0.50 19,062.88 4.00 532134 BANK OF BARO 968.35 35,273.75 0.50 17,636.87 3.71 532149 BANK OF INDI 556.00 29,199.75 0.40 11,679.90 2.45 532187 INDUS IND BK 268.80 12,397.56 0.75 9,298.17 1.95 532648 YES BANK 352.85 12,182.00 0.75 9,136.50 1.92 532477 UNION BANK 396.95 20,050.66 0.45 9,022.79 1.90 532483 CANARA BANK 638.55 26,180.55 0.30 7,854.17 1.65 500469 FEDERAL BANK 435.35 7,442.09 1.00 7,442.09 1.56 500116 IDBI BANK L 162.25 15,972.08 0.35 5,590.23 1.17 TOTAL 760,247.80 476,006.82

Cap

27.97 19.84 18.98 8.87 4.02

Index Calculation & Maintenance Formula for Calculation of Index All BSE indices (except BSE-PSU index) are calculated using following formula: Free-float market capitalization of index constituents/ Base Market capitalizati on * Base Index Value Index Closure Algorithm The closing index value on any trading day is computed taking the weighted avera ge of all the trades of index constituents in the last 30 minutes of trading ses

sion. If an index constituent has not traded in the last 30 minutes, the last tr aded price is taken for computation of the index closure. If an index constituen t has not traded at all in a day, then its last day's closing price is taken for computation of index closure. The use of index closure algorithm prevents any i ntentional manipulation of the closing index value. Maintenance of BSE Indices One of the important aspects of maintaining continuity with the past is to updat e the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcemen ts like 'rights issue' etc. do not destroy the historical value of the index. Th e beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values. The BSE Index Cell does the day-to-day maintenance of the index within the broad index policy framework set by the BSE Index Committee. The BSE Index Cell ensur es that all BSE Indices maintain their benchmark properties by striking a delica te balance between frequent replacements in index and maintaining its historical continuity. The BSE Index Committee comprises capital market expert, fund manag ers, market participants, and members of BSE Governing Board. On - Line Computation During trading hours, l time basis. This is in index constituents of the Index value of the indices is calculated and disseminated on rea done automatically on the basis of prices at which trades are executed.

Adjustment for Bonus, Rights and Newly Issued Capital Index calculation needs to be adjusted for issue of bonus and rights issue. If n o adjustments were made, a discontinuity would arise between the current value o f the index and its previous value despite the non-occurrence of any economic ac tivity of substance. At the BSE Index Cell, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the in dex value. The BSE Index Cell keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all BSE Indices. Adjustments for Rights Issues when a company, included in the compilation of the index, issues right shares, t he free-float market capitalization of that company is increased by the number o f additional shares issued based on the theoretical (ex-right) price. An offsett ing or proportionate adjustment is then made to the Base Market capitalization. Adjustments for Bonus Issue When a company, included in the compilation of the index, issues bonus shares, t he market capitalization of that company does not undergo any change. Therefore, there is no change in the Base Market capitalization; only the 'number of share s' in the formula is updated. Other Issues Base Market capitalization Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduc ed by way of buy-back of shares, corporate restructuring etc. Base Market capitalization Adjustment The formula for adjusting the Base Market capitalization is as follows: New Market capitalization New Base Market capitalization = Old Base Market capitalization x ---------------------------Old Market capitalization To illustrate, suppose a company issues additional shares, which increases the m

arket capitalization of the shares of that company by say, Rs.100 crore. The exi sting Base Market capitalization (Old Base Market capitalization), say, is Rs.24 50 crore and the aggregate market capitalization of all the shares included in t he index before this issue is made is, say Rs.4781 crore. The "New Base Market c apitalization" will then be: 2450 x (4781+100) ---------------------- = Rs.2501.24 crores 4781 This figure of Rs. 2501.24 crore will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change bec omes necessary. Free Float Concepts Understanding Free-float Methodology Concept Free-float Methodology refers to an index construction methodology that takes in to consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the Index. Free-f loat market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally e xcludes promoters' holding, government holding, strategic holding and other lock ed-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market. Subsequently all BSE indices with the exception of BSE PSU index have adopted th e free-float methodology. Major Advantages of Free-float Methodology A Free-float index reflects the market trends more rationally as it takes into c onsideration only those shares that are available for trading in the market. Free-float Methodology makes the index more broad-based by reducing the concentr ation of top few companies in Index. A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis--vis an investible index. This enables an apple-to-apple comparison thereby facilitating better ev aluation of performance of active managers. Being a perfectly replicable portfol io of stocks, a Free-float adjusted index is best suited for the passive manager s as it enables them to track the index with the least tracking error. Free-float Methodology improves index flexibility in terms of including any stoc k from the universe of listed stocks. This improves market coverage and sector c overage of the index. For example, under a full-market capitalization methodolog y, companies with large market capitalization and low free-float cannot generall y be included in the Index because they tend to distort the index by having an u ndue influence on the index movement. However, under the free-float Methodology, since only the free-float market capitalization of each company is considered f or index calculation, it becomes possible to include such closely held companies in the index while at the same time preventing their undue influence on the ind ex movement. Globally, the free-float Methodology of index construction is considered to be a n industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index , which is followed by Foreign Institutional Investors (FIIs) to track Indian eq uities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology. Definition of Free-float Shareholdings of investors that would not, in the normal course, come into the o pen market for trading are treated as 'Controlling/ Strategic Holdings' and henc e not included in free-float. Specifically, the following categories of holding are generally excluded from the definition of Free-float:

Shares held by founders/directors/acquirers which has control element Shares held by persons/ bodies with "Controlling Interest" Shares held by Government as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals Equity held by associate/group companies (cross-holdings) Equity held by Employee Welfare Trusts Locked-in shares and shares which would not be sold in the open market in normal course. The remaining shareholders fall under the Free-float category. Determining Free-float Factors of Companies BSE has designed a Free-float format, which is filled and submitted by all index companies on a quarterly basis (Format available on www.bseindia.com ). BSE det ermines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a mul tiple with which the total market capitalization of a company is adjusted to arr ive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is c ategorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be conside red for index calculation Free-float Bands % Free-Float Free-Float Factor % Free-Float Free-Float Factor >0 5% 0.05 >50 55% 0.55 >5 10% 0.10 >55 60% 0.60 >10 15% 0.15 >60 65% 0.65 >15 20% 0.20 >65 70% 0.70 >20 25% 0.25 >70 75% 0.75 >25 30% 0.30 >75 80% 0.80 >30 35% 0.35 >80 85% 0.85 >35 40% 0.40 >85 90% 0.90 >40 45% 0.45 >90 95% 0.95 >45 50% 0.50 >95 100% 1.00 Index Reach - BSE BANKEX http://www.bseindia.com/mktlive/indiceswatch.asp?iname=BANKEX&sensid=03&type=com p&graphpath=/applet/images/graf_appBANKEX.gif

Historical of Replacements in BSE BANKEX Date Outgoing Scrips Replaced by 09.02.2004 ING Vysya Bank UTI Bank Ltd. Kotak Mahindra Bank UCO Bank Indian Overseas Bank Jammu & Kashmir Bank 31.01.2005 ... Vijaya Bank Allahabad Bank Ltd.

06.06.2005 Corporation Bank Jammu & Kashmir Bank Ltd. UCO Bank

28.11.2005

... Centurion Bank Ltd. Indusind Bank Ltd Karnataka Bank Limited Indusind Bank Ltd Federal Bank Ltd.

03.07.2006

08.01.2007 Karnataka Bank ... Vijaya Bank 09.07.2007 09.06.2008 28.07.2008 ... Karnataka Bank Ltd. Yes Bank Ltd. Centurion Bank of Punjab Ltd. Andhra Bank IDBI Bank Ltd. Indusind Bank Ltd. ...