Don't stay invested in stocks out of indices, F&O list

The scrips usually tank once they make their exit

A total of 51 scrips will be excluded from the futures and options segment from today. The stocks include BEML, Bharat Electronics, Bosch, Bombay Dyeing, Fortis Healthcare, The Great Eastern Shipping Company, HCC, Jet Airways, TVS Motor Company, Tata Teleservices (Maharashtra) Ltd, MRPL, Indian Bank and Max India.

Along with these stocks, SAIL and Sterlite will no longer be a part of the Nifty 50.

Going by past data, majority of scrips that are excluded from the F&O segments or any of the indices the stocks tanks once they make their exit. Reliance Power a week before it was to be excluded from the Nifty was trading at Rs 115.2 a piece. On the date, it was down 12.5% from the week ago price. A month later it was 7.5% lower than what it was at the date of exclusion. The trend was seen with Reliance Communications.

The same trend is seen when it comes to stocks that are excluded from the F&O segment. Take the example of Orbit Corporation. The day the announcement of its exclusion was made, it was trading at Rs 46.9 a share. On the day of its last expiry, it was down
24.5% from the date of the announcement. A month later it was down 7.5% from what it was trading at on the last day of expiry of contracts in July of 2011. Similar trends were seen in the case of GTL, Moser Baer and so on.

When a stock is taken out by exchanges, it is a clear indication that it has suffered serious loss in market capitalisation and there are liquidity issues as well. Both are not good indicators for investors holding the stock.

If a scrip  is excluded, you should consider the reasons why it has been dropped from the index or F&O, says Radhika Gupta, director at Forefront Capital said earlier. “A stock could be excluded maybe because the price has fallen quite a bit or the company
has been continuously performing badly. In case the stock has been performing badly for long, you may want to exit the stock and invest in better performing ones,” says she.

The most important criteria for stocks to be included in the F&O segment are market capitalisation and liquidity. Typically, in bear markets, when the stock prices start falling, the market caps take a beating and, consequently, stocks are excluded from the space. In April 2009 when the Sensex was at 11,000-levels, the NSE took 50 stocks off its F&O list.

What's more, once off the list, they would not be re-introduced in the segment for at least a year. After which, the stock would have to fulfill criteria laid down by the exchange for three consecutive months to be reconsidered.

For staying in the benchmark indices, other than free float market capitalisation, there are a few other criterions. The other criteria include the scrip’s listing and trading history over the past three months, the company’s results in the past four quarters and so on.