What SENSEX should be representing ???

Lately, the Indian stock market has been booming. Whan ever the market booms it reminds us of 1993-94 and 2002 period. We become concious whether what the SENSEX is representing is a true picture of stock market or not. Afterall SENSEX represents movement of stock prices of only thirty companies.

This raise a crucial issue. Why only 30 companies should be included in SENSEX? Those who favor the current practice will opine that if the quality of rice that has been cooked can be judged from the sample, why one should analyze each grain and than there are costs associated with it. That argument might have been true when the technology aids were not available. If some microwave can tell you how much each rice grain is actually cooked and that too instantaneously, why shouldn’t one rely on age old method of taking sample. One might discover that while the rice sample is OK the rice at the bottom is actually over-cooked. To cut the story short one needs to go to the bottom to get the exact picture.

Strangely, BSE comes out with so many indices and data every day. In fact there are no incremental costs to get this data once every thing is computerized. There is in fact a BSE 500 index which actually covers 40.26 % of market capitalization and 77.83% of turnover ( as compared to BSE -30 which covers only half of this). Then why BSE – 500 is not used as SENSEX? It will actually give better picture. The two indices may move in the same direction but they may represent a different picture. If one calculates the difference (% wise) between the movement of the two indices for year 2005, (taking the % change of each one of them on the closing day of month) and see by what % the change differs. Sometimes the change differs by more than 100%.

Then why only BSE 30 is taken as SENSEX ??? As an investor I personally feel that market capitalization of mutual funds is increasing considerably and few fund companies can effect the index considerably by investing in 30 shares, which for 500 shares would be very difficult. This also tends to favor few companies whose shares are included in the 30 company list. (list is given at the end ). Ironically most of the players in stock market( financial institution ) happen to be on the list.

My very concerns are as investors. And let me tell you that the perceptions of common investors in India about the financial market are not very good. Every time the market starts picking up - on the scene arrives the Mehtas, Parekhs to prick the balloon. The market investors (I am talking of common household saving that goes into the financial market) looks at SENSEX movement as pulse of the market. To that extent why the SENSEX should be mere indicative? If at all this is the case, then why this indication is different from the BSE -500 index. I will tell you why?

Based on the SENSEX, the common investors’ sentiments are taken on ride and they start investing. Never in history of Indian stock market one mutual fund could collect 5700 crores (Reliance equity fund has done that recently) and that too from 1 million investors. Why people are investing? The SENSEX gives them an indication that they will get huge returns out of that( this is also fueled by media which despite all talent it has , understands that the SENSEX is what Indian stock market is). SBI blue chip collected about 2900 crores. Where all this money will be invested? In 30 companies (to a large extend) thus giving further boost to SENSEX as it represents only 30 companies. The investors see returns as the SENSEX moves up. In the mean time SBI will come out with RED CHIP and will collect 5000 cr as more investors will see value in rising SENSEX. The balloon is all set to be pricked again.
What snowballic effect the market will have remains to be seen.

As investor I fail to understand why SEBI could not control the simple fraud that is carried out IPO after IPO. When the IPO is about to come in market the share prices of the company will inflate (pseudo) and will fall flat the moment IPO is listed for trading.
Consider one more scenario – ICICI is investment bankers and they underwrite an IPO. As broker they are also advising the investors whether one should subscribe to this IPO or not. (You can see the advice link just on the web page where they sell IPO) Now if they are underwriting an issue do you expect them to say do not invest in this issue. They will advice invest for short term listing gains as well aslong term gains. So as underwriter, as banker and as broker ICICI will gain (and also the company which issues IPO) at whose cost – investors. These are not examples of Harshad Mehta period. This is happening now also.
Now these are very simple issues which a common investor like myself can understand – why SEBI can’t. They will wait for the scam to happen and then react.

Now-a-days SENSEX has become symbolic of markets acceptance of budget. The day budget is announced if the market is not upbeat about it (SENSEX not rising) then it is seen as failure of budget. Now what would you do if you want to show that the market has responded to budget. . Ask state owned financial companies to make sure that money is invested in 30 companies for next few days. If the SENSEX would have been representing the full market transaction, it would be extremely difficult.





SENSEX Constituents: 27-Feb-06

Code Name Sector Adj. Factor
500410 Associated Cement Companys Ltd. Housing Related 0.70
500490 Bajaj Auto Ltd. Transport Equipments 0.70
500103 Bharat Heavy Electricals Ltd. Capital Goods 0.35
532454 Bharti Tele Ventures Ltd. Telecom 0.35
500087 Cipla Ltd. Healthcare 0.60
500124 Dr Reddy's Laboratories Ltd. Healthcare 0.75
500300 Grasim Industries Ltd. Diversified 0.80
500425 Gujarat Ambuja Cements Ltd. Housing Related 0.80
500010 HDFC Finance 0.90
500180 HDFC Bank Ltd. Finance 0.80
500182 Hero Honda Motors Ltd. Transport Equipments 0.50
500440 Hindalco Industries Ltd. Metal,Metal Products & Mining 0.75
500696 Hindustan Lever Ltd. FMCG 0.50
532174 ICICI Bank Ltd. Finance 1.00
500209 Infosys Technologies Ltd. Information Technology 0.80
500875 ITC Ltd. FMCG 0.70
500510 Larsen & Toubro Limited Capital Goods 0.90
532500 Maruti Udyog Ltd. Transport Equipments 0.30
532555 National Thermal Power Corpn. Ltd. Power 0.15
500312 ONGC Ltd. Oil & Gas 0.15
500359 Ranbaxy Laboratories Ltd. Healthcare 0.65
500390 Reliance Energy Ltd. Power 0.50
500325 Reliance Industries Ltd. Oil & Gas 0.55
500376 Satyam Computer Services Ltd. Information Technology 0.90
500112 State Bank of India Finance 0.45
532540 Tata Consultancy Services Limited Information Technology 0.20
500570 Tata Motors Ltd. Transport Equipments 0.60
500400 Tata Power Co. Ltd. Power 0.70
500470 Tata Steel Ltd. Metal,Metal Products & Mining 0.75
507685 Wipro Ltd. Information Technology 0.20