The inclusion of Wipro by the National Stock Exchange (NSE) in its benchmark Nifty index has, however, surprised many considering that until December last, the considered opinion of the leading exchanges was that, notwithstanding its huge market capitalisation, Wipro's low floating stock contributed to volatile price swings and, hence, was unsuitable as an index constituent.
The Bombay Stock Exchange (BSE), on the other hand, is not planning to include Wipro in its 30-scrip Sensex.
According to a BSE spokesperson, "The exchange is not planning to include Wipro in the Sensex, abiding by its stand of not including closely-held scrips in the benchmark index."
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The NSE has, however, justified the inclusion of Wipro in the Nifty. According to Chitra Ramakrishnan, director of NSE, inclusions into the Nifty are based on a double-pronged criteria of an average market cap of Rs 500 crore or more in the last six months and that the security should have traded for 85 per cent of the trading days during the last one year at an average impact cost of less than 1.5 per cent.
According to calculations made by the NSE, the impact cost of Wipro is working to 0.84 per cent, while on the market cap front also Wipro became eligible after a quarterly review made by the exchange.
At present, Wipro's weightage in the index is around 11 per cent in Nifty, while Hindustan Lever has a weightage of 14.50 per cent.
The impact cost, which represents the liquidity of the stock, is defined as the cost of executing a transaction in a security, in proportion to the weightage of its market capitalisation, as against the index market capitalisation at any point of time. Impact cost is calculated based on the percentage mark up suffered while buying or selling the desired quantity of a security compared to its ideal price.
According to the BSE, Wipro's free float being only 16 per cent it cannot be included in the Sensex, which takes into consideration a company's market capitalisation for calculation of the index.
"If Wipro is included in the Sensex, the entire 100 per cent of market capitalisation of Wipro will have to be considered for calculation of the index. This will amount to overstating the true investibility in that stock," said a BSE official, adding that index fund managers would also find it difficult to invest in the scrip.
According to BSE, however, the benchmark index should reflect the underlying market. The weightage of infotech sector in the underlying universe of all listed stocks is around 17 per cent. The weight of IT sector in BSE-SENSEX is now at 16 per cent.
"Any inclusion of a scrip such as Wipro would increase the weightage of IT sector in the index substantially vis-a-vis the universe weight," BSE officials said.
In fact, according to BSE, the inclusion of Wipro in the Nifty has increased the weight of IT sector in the index to more than 21 per cent, much higher than the sector's weight in the universe at 17 per cent.
NSE has clarified that the since Wipro was included in the Nifty only recently, Jan 17, 2002, the available data is not sufficient to indicate whether the inclusion of Wipro has in any way impacted the volatility of the index.