NSE Index Rebalancing: Proposed Methodology For Nifty Next 50 Put On Hold

The index committee of the National Stock Exchange has put on hold its consultation on the revised index methodology that sought to remove non-futures and options stocks from the Nifty Next 50.

In its May 2023 consultation paper, the exchange sought feedback from market participants on changes to the construction of the indices by gradually removing stocks that are not part of the F&O segment.

The NSE Indices' proposal was based on the fact that the assets tracking the NSE Next 50—called the Nifty Junior Index—have increased significantly, which created issues with respect to replication because non-F&O stocks were either locked in upper or lower price bands. It was proposed that only stocks in F&O be included in the Nifty Next 50 Index. Additionally, the weight of each stock will be capped at 23%, and the weight of the top three index members will be capped at 62%.

NSE Indices has now clarified that, as the approach earlier proposed in the consultation paper required further deliberations with the market participants, a decision on the revision in the stock selection methodology of Nifty Next 50 has been kept on hold until further communication, it said in a statement.

The move follows strong pushback from passive funds (exchange-traded funds) tracking the Nifty Next 50 Index. It is not clear what the NSE Indices will do at the September review with respect to stocks that are not part of the F&O because the addition of the stocks is subject to different criteria that are vetted by the National Stock Exchange.

Half-Yearly Index Revamp

The index committee undertakes rebalancing of the indices twice a year, according to the NSE Indices calendar. The September rebalancing starts on Feb. 1 and ends on July 31. The changes are announced by August-end and implemented on Sept. 28.

To be eligible for the Nifty 50 or Nifty Next 50 Indices, the stock has to be in the Nifty 100 Index, and for this, the constituent should be in the Nifty 500 Index, according to the methodology. It should have an Investible Weight Factor or free float of at least 10%, or its six-month average free float market cap should be at least 25% of the average full market cap of the smallest existing index constituent.

Further, the cumulative weight of non-F&O stocks is capped at 10%, and individual weights of non-F&O stocks are capped at 4.5% on the quarterly rebalance dates.

According to index tracker Brian Freitas, under the current methodology, there will be no addition to the Nifty 50 and potentially five additions to the Nifty Next 50 Index. These include Punjab National Bank, TVS Motor Ltd., Shriram Transport Finance, Trent Ltd., and Zydus Lifesciences Ltd. While the deletions include ACC, FSN E-commerce, HDFC Asset Management Co., Indus Towers Ltd. and Page Industries Ltd.

The proposed index methodology would have led to the replacement of 11 non-F&O stocks with non-constituents that are part of the F&O segment.