With norms under review, Adani group's Sensex dream may have to wait

BSE has proposed that a stock must have a derivative contract to be eligible for inclusion in the flagship 30-share Sensex index

Two firms belonging to the Adani group — India’s most valued conglomerate — are part of the Nifty 50 index. The group, however, has no representation in the Sensex. And it could stay this way if a proposed index qualification rule change gets approved.
 

Last week, Asia Index, a joint venture between S&P Dow Jones Indices and BSE responsible for index composition, floated a consultation paper where it proposed that a stock must have a derivative contract to be eligible for inclusion in the flagship 30-share Sensex index.
 

At present, at least 90 per cent of weightage of the Sensex constituents has to be linked to derivatives trading. This leaves scope for a stock that is not part of the futures and options (F&O) segment of the market to be part of the index. It also allows a large initial public offering (IPO) to gain fast-track entry into the index as the company doesn’t have to wait to first get added to the derivatives segment.
 

If the proposed change is accepted, most Adani group companies, frontrunners for Sensex inclusion, could be impacted.

Analyst Brian Freitas of Periscope Analytics, who publishes on Smartkarma, says a bunch of Adani-group companies are at the cusp of index inclusion and are not a part of the F&O market.

 

The Sensex’s next rebalancing is in December. But the review period to decide the addition and deletion of stocks ends October 31. According to the latest data, Dr Reddy’s is seen as a candidate for exclusion. On the other hand, any one of Adani Transmission, Tata Motors, Adani Total Gas, Adani Green Energy and Adani Enterprises are potential inclusions. Of the five, only Tata Motors and Adani Enterprises are part of BSE’s F&O segment.
 

While Adani Transmission, Tata Motors and Adani Total Gas have higher free float market cap but since preference is also given to stocks belonging to sectors that are under-represented in the index, one can’t say for sure which one of the five stocks could get added.
 

Why such a move
 

BSE’s bigger rival NSE already has such a rule in place. All the Nifty 50 components have to be part of its derivatives segment. Experts say this is beneficial for investors and money managers.
 

“The introduction of non-F&O stocks could create replication issues for portfolio managers that use derivatives to get exposure to the index and could also lead to stocks trading limit up/down and create tracking error for these managers. Stocks in F&O do not have daily price limits. The inclusion of non-F&O stocks could also preclude arbitrage between the Sensex futures and the single stock futures on the index constituents,” says Fretias.
 

The feedback for the consultation paper floated by Asia Index closes on November 4. Sources said if the market response is positive on the inclusion of only F&O stocks, the change could become effective before the December rebalance.