Come April 10, a new-avatar 30-share BSE Sensex will be flashed on brokers' trading screens. Four stocks-idbi, Tata Chemicals, Indian Hotels and Tata Power-will be replaced with Zee Telefilms, Satyam Computers, Reliance Petroleum and Dr Reddy's Laboratories. The change in the Sensex's composition looks like another blow to the Old Economy, and a fillip to the New.
Zee, which had a market capitalisation of Rs 48,800 crore on March 10 (the day prior to the Sensex recast announcement), itself takes a 12 per cent piece of the Sensex cake, making it the third largest stock in the index after Infosys and Hindustan Lever. Satyam Computers and Reliance Petroleum follow in fourth and fifth positions.
At first sight, it seems absolutely fair that these four stocks should be part of the Sensex. However, some observers fear that they would make the Sensex even more of a hostage to the "big operators". In recent weeks, the Sensex has been gyrating wildly, with broker-operators contributing the most to this volatility. Says Ajay Shah, assistant professor at the Mumbai-based Indira Gandhi Institute of Development Research: "A basic property that is required of stocks for use in an index is that their liquidity as measured by the impact cost should be in proportion to their market cap. Larger stocks have bigger weights in the index and so should have greater liquidity." This principle, feel some, has not been followed in the Sensex recast.
The BSE doesn't agree. The selection criteria, according to Manoj Vaish, director, corporate development, "involved putting companies through liquidity screens such as daily trading and being in the top 150 companies in daily average trades, shares traded and traded value". But "impact cost" over a period of time has not been considered. This, mathematically, is the percentage difference between the executed price and the average of the best buy and sell price. In plain English, the higher the impact cost, the more the price paid differs from a "fair price" and the more illiquid the share. And operators work this price gap to great advantage.
The BSE also didn't disclose the shortlisted scrips that went through the screening process because, as Vaish puts it: "This is not made public to avoid unwarranted controversies. The index committee, which is fairly broadbased, takes decisions based on their wisdom and judgement."
Take your pick.
