What is NIFTY?

Authored by
Team Espresso
September 06 2022
3 min read

What is NIFTY, How Do Stocks List on NIFTY, and other questions answered

The National Stock Exchange of India (NSE) introduced a market index on 21st April 1996 named NIFTY. Nifty is a combination of the National Stock Exchange and 50 — that’s the top 50 equity stocks which are performing well in the market out of approximately 1,600 stocks being traded on the NSE. NIFTY 50 is the flagship index of the NSE and belongs to the Futures and Options (F&O) division of the NSE.

NIFTY comprises 4 indices — NIFTY 50, NIFTY Next 50, NIFTY Bank, and NIFTY IT. The stocks in NIFTY cover 12 sectors of the Indian economy. These sectors include financial services, telecommunications, entertainment and media, pharmaceuticals, metals, cement and its products, consumer goods, information technology, fertilizers and pesticides, etc.

Eligibility criteria for NIFTY listing

NIFTY is reconstituted every six months to incorporate the latest trends into it. The performance of each company in this span of six months is factored in to determine whether the shares of the company fulfil the eligibility criteria. An index advisory committee, consisting of professionals with expertise on equity indices, manages the NIFTY index. They make necessary changes in the index by removing or including stocks as per the benchmark. These changes are conveyed through a notice to the company in question four weeks prior to the reconstitution.

Apart from the bi-annual reconstitution of NIFTY, in events such as merger, spin-off, compulsory delisting or suspension of a company, a reconstitution of NIFTY can be undertaken. Furthermore, quarterly screenings of each company listed in NIFTY is conducted to ensure that the portfolio regulations are being adhered to. These regulations relate to Exchange-Traded Funds (ETFs) and Index Funds. The regulations are set out by the Securities and Exchange Board of India (SEBI) and it is mandatory for the companies to abide by them. Failure to do so will result in the company being delisted from the indices.

The eligibility criteria are as follows:

  • The company should be of Indian domicile, and should be listed on the NSE
  • The trading frequency for the company’s shares in the past 6 months should be 100%
  • The stock should be highly liquid. The liquidity of the stock is measured by its average impact cost, which is the cost of trading an individual security in relation to the index weight to the company’s market capitalization.
  • The company should have an average free-float market capitalization which should be higher than the smallest constituent by 1.5 times
  • Companies with shares having Differential Voting Rights (DVR) are eligible to be included in NIFTY.

Computing NIFTY

Float-adjusted and market capitalization weighted methods are used to compute the NIFTY indices. The aggregate of the market value of the shares included in the index for a specific time period is demonstrated by the level of the index. The first step in computing the value of NIFTY is to calculate the market capitalization, which is equal to the current market prices of the shares multiplied by the number of outstanding shares. Then the value of free float market capitalization is to be computed by multiplying the outstanding shares with price and Investable Weight Factors (IWF).

And then finally, the index value is computed by dividing the current market value by the base market capital, and multiplying the result with the NIFTY base index. The base year for NIFTY is 1995; the base index value is 1,000, and the base capital is Rs 2.06 lakh crore.

Along with the formula, changes in corporate procedures are also weighed in to arrive at the final indices for NIFTY.

Companies in NIFTY50

Some of the companies in the NIFTY 50 as on July 2022 are Bajaj Finserv Ltd., Tata Steel Ltd., IndusInd Bank Ltd., Infosys Ltd., and Tech Mahindra Ltd.