The makeover of Sensex

Only seven companies survive from the original list

It is a truism that equities offer higher long-term returns than other financial assets. This is certainly the case with the Sensex, or the BSE Sensitive Index. Over the 40 years that the Sensex has, sort of, been in existence, it has delivered compounded capital gains of about 16 per cent per annum, along with 1.5 per cent in annual dividends. That beats inflation comfortably. The Sensex was actually launched in 1986. The BSE compiled it as a ready reckoner to track the combined share prices of the 30 largest listed companies in India. The methodology was adopted from the venerable Dow Jones Industrial Average (DJIA) of the New York Stock Exchange, and a base year of 1979-80 was chosen. Hence, though only 33 years old, the Sensex’s history reaches back 40 years.

The tectonic shifts in the economy across those four decades are illustrated by changes in the index composition. As companies gain (or lose) market value and sectors gain in importance, they move in (and out) of the index. Only seven companies survive from that original list of 30 — namely (in alphabetical order), Hindustan Unilever, ITC, Larsen & Toubro, Mahindra & Mahindra, Reliance Industries and the Tata twins — Tata Steel (then known as “Tata Ordinary”) and Tata Motors (aka “Telco”). The current index includes several entirely new sectors which did not exist in 1986. There were no listed banks in 1986, for example, since the entire sector was nationalised. Banking is now the single-largest sector by weight. The Sensex set includes five private banks with just one public sector bank. Add in non-banking financial companies, and the sector is, by far, the most important index component. India’s information technology industry was barely conceptualised in 1986 and there were no listed IT companies. IT is now the second-largest sector by weight. There are two listed mining conglomerates including a public sector unit, and another Sensex PSU is a producer of crude oil and natural gas. There are six listed automobile companies — there were only three in 1986.

The 2019 Sensex also includes a private telecom service provider with 350 million subscribers, and another company, which is nominally classified as a refiner/marketer of fuels, also owns a large telecom service with 280 million subscribers. This was unthinkable in 1986, when getting a landline meant being on the waiting-list for years. Old-style commodity businesses such as cement producers, textile manufacturers and paper mills have gradually been shouldered out by these new upstarts that were only allowed to start operations after the New Economic Policy of 1991. The index composition also shows the increasing importance of private consumption since banking, finance, telecom, automobiles et al are largely driven by retail consumption.

Liberalisation came relatively late to the investment industry itself. Private mutual funds, exchange-traded funds, and ULIPs were not allowed to provide services until the 21st century. This means that, in many ways, the returns indicated by the Sensex were just a theoretical construct for the first 15 years or so of its existence. There were no index funds or ETFs available to capture index performance; there was only UTI, which offered strange instruments with no correlation to stock-market movements. Individual investors punted as they pleased, trading paper certificates in an opaque system of open outcry where huge brokerages were charged and transactions rolled over for years on end. Indeed, the creation of a financial regulator, the Securities and Exchange Board of India (Sebi), triggered a strike in April 1992 by the brokers who controlled the BSE. That strike led directly to the discovery of the Harshad Mehta scam. The legendary “Big Bull” couldn’t liquidate his stock positions to return cash “borrowed” from the banking system.

The BSE is now a listed corporate entity and the Sensex has, in many ways, been superseded by the broader Nifty. But it remains a unique artefact with India’s financial history embedded within in its meandering journey northwards.