IMPACT OF THE DERIVATIVES ON

INDIAN STOCK MARKET

( A STUDY OF SELECTED STOCK MARKET
INDICES)

A project report on
IMPACT OF THE DERIVATIVES ON INDIAN
STOCK MARKET
(A STUDY OF SELECTED STOCK MARKET
INDICES)

Dissertation submitted to

GOA UNIVERSITY
In partial fulfillment of the award of the degree of

MASTER OF PHILOSOPHY (M.Phil.)

(COMMERCE)
By

Sanjeeta Vasant Shirodkar

Roll No: co-1301
Under the Guidance of

Dr. Sriram Padyala

Department Of Commerce
Goa University

DECLARATION
I declare that the project report title IMPACT OF THE DERIVATIVES
ON INDIAN STOCK MARKET (A STUDY OF SELECTED STOCK
MARKET INDICES) has been prepared by me towards the partial

fulfillment of the degree of Master Of Philosophy (M.Phil.); and to the best

of my knowledge it has not been previously formed the basis for the award
of any degree, diploma or other similar titles by this or any other university.

Date:
Place:

Sanjeeta Vasant Shirodkar

Roll No: CO-1301
M.Phil. ( Semester II)

CERTIFICATE

This is to certify that the project entitled IMPACT OF THE

DERIVATIVES ON INDIAN STOCK MARKET ( A STUDY OF
SELECTED STOCK MARKET INDICES)is

submitted by the

candidate Miss SANJEETA VASANT SHIRODKAR under my

supervision and guidance. To the best of my knowledge it
has not previously formed the basis of the award of any
Degree or Diploma in Goa University or elsewhere.

Date:
Place:

Dr. P. Sriram
Assistant Professor
Department of Commerce
Goa University
Taleigao - Goa

ACKNOWLEDGEMENT

This acknowledgement is a small effort on my part to do justice to all those

who have helped me in the accomplishment of this project.
First of all, I would like to thank my Faculty Guide, Asst. Prof. (Dr.)
P.Sriram, for his motivation, suggestions and supervision. He has been a
source of training, encouragement and enthusiasm for me at all the stages of
this work.
Last but not the least I would like to thank all who directly or indirectly
contributed towards fulfillment of my project.

SANJEETA SHIRODKAR
M.Phil.SEMESTER II
GOA UNIVERSITY
APRIL 2013

INDEX
Sr. no

Contents

Page No.

Chapter 1
1.1
1.2
1.3
1.4
1.5

INTRODUCTION
Introduction
Literature review
Objectives and Scope of the Study
Data and Methodology
Limitations of the study

1-5
1
2
3
3
5

Chapter 2
2.1
2.2
2.3
2.4

INTRODUCTION TO CNX NIFTY

Introduction
Constituent of CNX Nifty
Sector wise representation
Trends in CNX Nifty

6-10
6
6
7
8

Chapter 3
3.1
3.2
3.2.1
3.2.2
3.2.3
3.3

CNX NIFTY COMPOSITION

Calculating methodology
Script selection criteria
Liquidity (Impact Cost)
Floating Stock
Others (IPO, replacement of stock)
Reason for Replacement

11-13
11
11
11
12
13
13

Chapter 4 TEST RESULTS OF PRICE EFFECTS OF CNX

NIFTY REORGANIZATION
4.1
Analysis of Cumulative Abnormal Returns (CAR)
for all 3 windows
4.2
Analysis of Cumulative Average Abnormal Return
(CAAR)

14-17

Chapter 5 Conclusion
References
Annexure

18
19
20-25

14
16

ANNEXURE
List of exhibits
Sr. no

Contents
Sample size for CNX Nifty Index

Page no.
20

Constituents Of CNX Nifty With Weightage As On

March 2013

20

CAR (in %) of Companies Included In CNX Nifty

since 2006 2012 in Pre Announcement,
Announcement to Effective Date, and Post Effective
Period.
CAR (in %) of Companies Excluded from CNX Nifty
since 2006 2012 in Pre Announcement,
Announcement to Effective Date, and Post Effective
Period.
Cumulative Average Abnormal return (CAAR) for
Included & Excluded Companies

One Year Average Returns Before & After the

Company Included In CNX Nifty Index

24

One Year Average Returns Before & After the

Company Excluded In CNX Nifty Index

25

21

22

24

CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION
In India, capital markets have been playing an increasingly important role, determining
the pace and pattern of economic growth and the stock exchanges are a vital institution
of the capital markets. As an important intermediary in the capital market, a stock
exchange provides an organized marketplace for transparent price discovery, where
trading members (brokers) use a trading platform, typically an electronic one, to trade in
securities
The institution of stock exchanges has a long history in India; the oldest stock exchange
in India being more than 100 years old. The major reforms in the structure and
governance of the exchanges in their long history, however, came only in the early
1990s. Modernization of stock exchanges and other trading related institutions during
this period coincided with the establishment of Indias capital market regulator, the
SEBI. In the past two decades, the Indian capital markets have grown tremendously with
exchanges and SEBI playing a central role. Over the years, the price discovery has
become more efficient resulting in better resource allocation; transactions have become
faster, safer and cheaper; number of investors has risen and markets have become
globalized. Overall, the Indian markets have become larger, deeper, diversified and more
modernized.
A stock index reflects the mood and direction of the overall market. Apart from being an
indicator of the market movements, stock indices also serve as a benchmark for
measuring the performance of fund managers. The innovations in the financial markets
and the modern portfolio theory had redefined the uses of stock indices for instance the
advent of index funds. Stock indices are rarely static; their composition changes so that
the objectives behind the construction of indices are served.
Of course the changes might also be driven by other reasons like mergers and corporate
restructuring that make some of the stocks cease to exist from the market. Although the
changes in an index like CNX Nifty are a regular phenomenon, these actions will have
implications for markets in general and index funds in particular. When a stock is added

(deleted) to the CNX Nifty, index funds will try to include it in their portfolio and these
actions may induce buying (selling) pressure and correspondingly the price level is
increased (decreased) and the volume levels of both types of stocks are increased. This
work attempts to empirically investigate the implications of CNX Nifty revisions over
the period 2006 to 2012.

1.2 LITERATURE REVIEW

A large body of literature examining the effect of stock inclusions (exclusions) to (from)
has the S & P 500 as the focal point. The extant literature provides conflicting evidence
for the S & P 500 for various reasons. Shliefer (1986) was among the first to investigate
the index effect and his study examined price impacts related to changes in S & P 500
between 1966 and 1983. His study found an abnormal price increase of 2.79% and the
cumulative returns persisted. The returns are positively related to measures of buying by
index funds and the results were attributed to the downward sloping demand curves for
stocks
Harris and Gurel (1986) used almost a similar sample and showed a 3.13% abnormal
return resulting from additions to the S & P 500. This increase is almost reversed after
two weeks and thus they attributed the abnormal returns to the increased demand from
the index funds. Their evidence is consistent with the price pressure hypothesis. Another
contemporaneous study by Woolridge and Ghosh (1986) found permanent price
increases consistent with downward sloping long run demand curve. They also document
that trading volumes also increased during the event month while relative volumes
actually declined in the months following the event and thereby the volume results are
consistent with the price pressure hypothesis.
Most of the studies (at least till 2000) have examined the index effects for S & P 500 in
the U.S. This may be due to the larger size of the index funds tracking S & P 500, but of
late there are some studies that examined the index effects in other countries as well.
As far as Indian market is concerned Vijaya (2002) has investigated the price effects for
the Sensex. Though the study reports a weak permanent price effect for deletions the
researchers caution that the study suffers from the problem of assumed announcement
dates as BSE did not maintained a record of the exact announcement dates. So the study

has rather limited research focus along with uncertain announcement dates. In conclusion
we can note that the existing literature is more or less unanimous on the premise that
index revisions are associated with price effects but the debate is whether the price
effects are temporary or permanent and also there is disagreement on the explanations for
these findings
S S S Kumar (2009) studied Price and Volume Effects of CNX Nifty Index
Reorganizations. The study finds no significant price effects on the announcement day.
However price effects were observed only for the CNX Nifty index on the effective day
averaging around 1.47% which is subsequently reversed by ninth day.

1.3 OBJECTIVES AND SCOPE OF THE STUDY

This study contributes in the following ways,
To understand the CNX Nifty in detail
To understand the price effects of CNX Nifty reorganization
An exhaustive analysis of the price effects are being reported from an emerging
market like India
The results of the study will be interesting for index funds and self-indexers, who
balance their portfolios in line with the changes in the index, as it will throw light
on any hidden transaction costs.
The index changes affect other portfolio managers whose Funds are benchmarked
to CNX Nifty index.
Another set of investors who will prefer to invest in index stocks is foreign
investors.

1.4 DATA AND METHODOLOGY

SAMPLE
NSE web site provides the complete details of the Names, Announcement Dates and
Effective Dates of all the stocks that were included to the CNX Nifty over the period
2006 to 2012. Though initial sample size is 27 the final samples are somewhat smaller
due to following reasons:
1.

Corporate actions (like mergers & amalgamations)

2. Inadequate data to estimate the parameters

Sample details are shown in the Exhibit 1 below
METHODOLOGY
In this study the price effects were investigated in the event study framework and the
windows employed are mentioned. CAR is calculated for the distinct window periods .
The first window is the announcement window starting from tenth day prior to the
announcement (AD-10). The second window is from the Announcement Date to the
Effective Date (AD-ED). Then the third window is the effective window or the
implementation window that commences ten day after the change becomes effective
(ED+10).
An event study analyzes the impact of an event (a stocks inclusion/exclusion from an
index) by studying the asset price returns over relatively short periods of time. This is
achieved by using a model to estimate the normal return defined as the stocks return if
the event had not occurred. The excess returns, which the event generates, are found as
the difference between the actual return and the estimated normal return. There are
several models that can be used to estimate the normal returns. I have used the market
model approach, which was found to be well specified under a variety of conditions
when daily returns are used. For every security, the excess return for each day in the
event period is estimated as
R j, t = j + jR m, t + j, t
where Rj and Rm denote the returns to stock j and the market portfolio on dayt
respectively and the excess returns AR j,t are computed as
AR j, t Rj, t j jR m, t
In order to draw inferences the excess returns were aggregated along two dimensions along time and across securities.
Cumulative excess returns were calculated as CAR (T1, T2) and is defined as the sum of
all the excess returns over the window of interest.

I have also calculated Cumulative abnormal average returns (CAAR) for the study.
It may be noted that the number of trading days between AD to ED may be different for
each change because each announcement was not followed by the same number of
trading days before implementation.
Where AD means Announcement Date and ED means Effective Date

1.5 LIMITATION OF THE STUDY

The data used for the study is secondary data, there might be error in data
collected which may lead to wrong results.
And because of time constrain study is limited to shorter period.

CHAPTER 2
INTRODUCTION TO CNX NIFTY

2.1 INTRODUCTION
CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL),
which is a joint venture between NSE and CRISIL. IISL is India's first specialized
company focused upon the index as a core product. The CNX Nifty Index represents
about 65.87% of the free float market capitalization of the stocks listed on NSE as on
December 31, 2012.
The total traded value for the last six months ending December 2012 of all index
constituents is approximately 50.23% of the traded value of all stocks on the NSE.
Impact cost of the CNX Nifty for a portfolio size of Rs.50 lakh is 0.06% for the month
December 2012. CNX Nifty is professionally maintained and is ideal for derivatives
trading. From June 26, 2009, CNX Nifty is computed based on free float methodology.

2.2 CONSTITUENTS OF CNX NIFTY

The CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the
economy. It is used for a variety of purposes such as benchmarking fund portfolios,
index based derivatives and index funds. The reward-to-risk ratio of CNX CNX CNX
Nifty is higher than other leading indices, making it a more attractive portfolio hence
offering similar returns, but at lesser risk. The list of all CNX CNX Nifty constituents is
shown in Exhibit 2 below.
TOP 10 CONSTITUENTS BY WEIGHTAGE

Companys Name
I T C Ltd.
Infosys Ltd.
Housing Development Finance Corporation Ltd.
Reliance Industries Ltd.
ICICI Bank Ltd.
HDFC Bank Ltd.
Tata Consultancy Services Ltd.
Larsen & Toubro Ltd.
Oil & Natural Gas Corporation Ltd.
State Bank of India
nesindia.com

Weight (%)
9.29
7.64
6.99
6.96
6.61
6.28
4.41
4.05
3.02
2.93

Source:

ITC is been given maximum weightage in the CNX Nifty index followed by Infosys &
HDFC, etc. ITC was part of index since its introduction. Out of top 10 constituents 3
are banks, which clearly shows that banking sector is given importance in the CNX Nifty
index.

2.3 SECTOR REPRESENTATION

Graph 1: Sector Wise Representation of Constituents in Index

Sector wise Weight (%)

p
e
r
c
e
n
t
a
g
e

30
25
20
15
10
5
0

Source: nesindia.com

Weight (%)

From the above graph it is clear that in CNX Nifty the highest (28.53%) weightage is
given to financial services sector. The companies included from the sector are State
Bank of India, ICICI Bank Ltd., HDFC Bank Ltd., Axis Bank Ltd., IDFC Ltd.,
Kotak Mahindra Bank Ltd., PNB, etc. The financial services sector plays a critical

role in any modern economy. Second is energy (15.71%) followed by IT (14.45%) and
consumer goods (13.14%).

2.4 TRENDS IN CNX NIFTY

If someone has entered in the Indian stock market anywhere during the Bull Run (20032007), they have witness of one of the biggest Bull Run for Indian stock market. India
has the lowest Exports/GDP ratio, yet when the world was in trouble, the Indian stock
markets were hit the most. Indian stock has witnessed extreme activities and is slowly
gaining more importance due to its high volatility. The Indian equity market kept on
sliding in September 2008 with the CNX NIFTY, showing the second sharpest fall since
January 2008, with a decline of around 10%. With all courtesy to the US financial
markets and its crisis bug, an estimated amount of Rs 2.3 trillion of shareholders' wealth
were eroded in the Indian stock markets.
It is generally believed that the global financial crisis left India virtually unaffected. The
Indian stock markets are in a tizzy. The impact of the global sub-prime crisis, known
mainly as the 'financial tsunami', emanated from the US and spread its wings across the
world. This has resulted in a whirlwind, sweeping the Indian capital market off its feet.
From 2006 to 2012 the Indian stock market has witnessed the lifetime high as well as
lifetime low prices.

Graph 2: Movement in CNX Nifty since 2006 to 2012

Movement in Nifty since 2006 -2012

7000
6000
5000
r
u
p
e
e
s

4000
3000

Close

2000
1000
0

date

Source: monthly data from yahoo finance

On 2nd January 2006 CNX Nifty opened at 2836.85 and since then it went up increasing
till December 2008. This is one of the long bullish trends (2003-2008). In January 2008
it hit the maximum; it gave the market top in the same period, on 7 th January 2008 CNX
Nifty closed at 6279.19. Then it started slowly falling till August 2008. In September
2008 it fell sharply and hit the low in October 2008; it closed at 2524.2 on 27 th October
2008. Till March 2009 Indian market witnessed worst time, the main reason being the
US Sub-prime crises. In April 2009 CNX Nifty showed the signs of recovery and by the
end of September 2010 it again crossed the 6000 levels. In august 2011 again market
corrected, it traded below 5000 but it never went below 4700. At present CNX Nifty is
trading between 5700 to 6000 levels.
The Indian stock market appeared to be highly dependent on the foreign institutional
investors. The exchange value of rupee depreciated as a consequence of the capital
withdrawals from India. Not only that, the global liquidity crisis squeezed the external
borrowings of the Indian corporate and banking sectors considerably. However, the
exposure of Indian economy has increased over time.

Domestic factors play a very important role in market fluctuations but global
phenomenon cannot be ignored. With the globalization of economy the interdependence
amongst the countries has increased. In the emerging economy like India, the whole
world is interested to invest in Indian markets and so also Indian markets will be affected
by international events.

CHAPTER 3
CNX NIFTY COMPOSITION

3.1 CALCULATING METHODOLOGY

CNX Nifty is computed using free float market capitalization weighted method, wherein
the level of the index reflects the total market value of all the stocks in the index relative
to a particular base period. The method also takes into account constituent changes in the
index and importantly corporate actions such as stock splits, rights, etc without affecting
the index value.
BASE DATE AND VALUE
The base period selected for CNX Nifty index is the close of prices on November 3,
1995, which marks the completion of one year of operations of NSE's Capital Market
Segment. The base value of the index has been set at 1000 and a base capital of Rs.2.06
trillion.

3.2 THE INDEX AND THE SELECTION CRITERIA

The CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the
economy. It is used for a variety of purposes such as benchmarking fund portfolios,
index based derivatives and index funds.
SCRIPT SELECTION CRITERIA
The constituents and the criteria for the selection judge the effectiveness of the index.
Selection of the index set is based on the following criteria:
3.2.1. LIQUIDITY (IMPACT COST)

For inclusion in the index, the security should have traded at an average impact cost of
0.50% or less during the last six months for 90% of the observations for a basket size of
Rs. 2Crores.
Impact cost is cost of executing a transaction in a security in proportion to the weightage
of its market capitalization as against the index market capitalization at any point of time.
This is the percentage mark up suffered while buying / selling the desired quantity of a
security compared to its ideal price (best buy + best sell) / 2.
Liquidity in the context of stock markets means a market where large orders can be
executed without incurring a high transaction cost. The transaction cost referred here is
not the fixed costs typically incurred like brokerage, transaction charges, depository
charges etc. but is the cost attributable to lack of market liquidity. Liquidity comes from
the buyers and sellers in the market, who are constantly on the look out for buying and
selling opportunities. Lack of liquidity translates into a high cost for buyers and sellers.
Impact cost represents the cost of executing a transaction in a given stock, for a specific
predefined order size, at any given point of time. Impact cost is a practical and realistic
measure of market liquidity; it is closer to the true cost of execution faced by a trader in
comparison to the bid-ask spread. It should however be emphasized that:

impact cost is separately computed for buy and sell

impact cost may vary for different transaction sizes
impact cost is dynamic and depends on the outstanding orders
where a stock is not sufficiently liquid, a penal impact cost is applied

3.2.2. FLOATING STOCK

Companies eligible for inclusion in CNX Nifty should have at least 10% floating stock.
For this purpose, floating stock shall mean stocks which are not held by the promoters
and associated entities (where identifiable) of such companies.
Floating stock means the number of shares of a publicly-traded company available
to trade. It is important to note that this may be different from the shares outstanding:
some shareholders may buy and hold, reducing the size of the float. The size of a floating
supply greatly affects a stock's volatility. If it is small, any number of activities could
affect greatly its price, especially a single large order to buy or sell it. This would greatly

alter the number of shares available to trade, creating too little or too much supply and,
therefore, drive the price up or down. A large floating supply tends to have less volatility
because large orders do not affect the supply as much. It is also called a float.

3.2.3. OTHERS
a) A company which comes out with a IPO will be eligible for inclusion in the
index, if it fulfills the normal eligibility criteria for the index like impact cost,
market capitalization and floating stock, for a 3 month period instead of a 6
month period.
b) Replacement of Stock from the Index:

3.3 A Stock May Be Replaced From An Index for the Following Reasons:
i. Compulsory changes like corporate actions, delisting etc. In such a scenario, the stock
having largest market capitalization and satisfying other requirements related to liquidity,
turnover and free float will be considered for inclusion.
ii. When a better candidate is available in the replacement pool, which can replace the
index stock i.e. the stock with the highest market capitalization in the replacement pool
has at least twice the market capitalization of the index stock with the lowest market
capitalization.
With respect to (2) above, a maximum of 10% of the index size (number of stocks in the
index) may be changed in a calendar year. Changes carried out for (2) above are
irrespective

of

changes,

if

any,

carried

out

for

(1)

above.

From June 26, 2009, CNX Nifty is computed using Free Float Market Capitalization
weighted method, wherein the level of index reflects the free float market capitalization
of all stocks in Index
Stock markets are very sensitive and they get affected whenever there is any calamity in
the world whether it relates to religion, politics, finance, etc. So the decision in choosing
the stocks should be very specific. One should be very practical and precise and also
need to be very sure of the goals in the stock market. One should have good idea about
CNX Nifty index and its role in the stock market.

CHAPTER 4
TEST RESULTS OF PRICE EFFECTS OF CNX NIFTY
REORGANIZATION

The study examines the impact of CNX Nifty reorganization on the share price of the
companies in short period. Given the clear selection criteria for inclusion in CNX Nifty
index it may appear that one can possibly predict the changes. But with hundreds of
stocks to choose from it will be difficult for the traders to speculate the inclusions
consistently, since the candidate stocks after meeting the liquidity and market
capitalization criteria they should also make the index representative of the market, well
diversified and retain its hedging effectiveness. So to anticipate the changes over and
over again is rather difficult.
The results of different window period of CAR are analyzed in order to examine the
impact of CNX Nifty reorganization on the Share price of the 20 included companies and
23 Excluded companies in and from the CNX Nifty since 2006 -2012.

4.1 ANALYSIS OF CUMULATIVE ABNORMAL RETURNS (CAR) FOR ALL 3

WINDOWS
H1: There are no excess returns in the pre announcement window (AD to AD-10)
The Pre Announcement period starts from Announcement Date to Announcement Date
-10 days (AD to AD-10) When a stock is selected for inclusion/exclusion in the CNX
Nifty index, assuming absence of ideal liquidity conditions excess returns may occur on
the effective day due to the activity of the index funds and self-indexing investors. No
much excess returns are expected in pre announcement period.
From the Exhibit 3 it can be seen that out of 20 included companies 11 companies
showed the negative returns highest being the Unitech (53.84 %) in preannouncement
window period.

From the Exhibit 4 it can be observed that out of 23 excluded companies 10 shows
negative returns in pre- announcement period; highest being DRREDDY (-8 %).
Here the hypothesis is rejected; as there was a movement observed in share prices. For
included companies there were negative returns whereas for excluded companies
positive abnormal returns could be seen.
H2: There are no excess returns on the Announcement Day to Effective Day (ADED)
The decision to include (exclude) a particular stock into the index may stimulate the
buying (selling) interests of the indexers. This demand from them may bring about
increased volumes on the implementation day or perhaps few days around the event day
depending on the response of the index funds and self indexers.
As per exhibit 3, out of 20 included scripts 12 companies shows the positive returns.
Unitech which had (-53 %) negative returns in pre announcement period had moved up
to (9%) positive returns in the share price. JINDALSTEEL also moved up and gave
positive returns (21%) in this window. All together 12 companies out of 20 improved
there returns in these window.
As per exhibit 4 Out of 23 companies 14 companies showed the negative returns in this
window, Satyam computers being the highest (-39%) effected by the move; From 9%
positive returns in pre-announcement period to -39% in announcement to effective day
window.
Reject the hypotheses, as per exhibit 5 there is excess positive returns of 1.13 % for
companies included in CNX Nifty where as -4.42 % returns for the companies excluded
from the index.
H3: There are no excess returns in the post event window(ED to ED+10)
For the included companies positive returns in post event period is expected. As per
exhibit 3 it can be observed that in ED+10 window half (10 of 20) of the companies
have maintained positive returns while half (10 of 20) have reduced the returns.
Out of excluded companies the 14 companies has improved the share price. Whereas
reaming 9 companies continues to face fall in share price.

Reject the hypotheses as there are abnormal returns are observed in many excluded
companies.

4.2 ANALYSIS OF CUMULATIVE AVERAGE ABNORMAL RETURN (CAAR)

Exhibit 5 explains the CAAR across the securities. For the included script it is observed
that there is positive return in the window of AD-ED; 1.13 % positive change can be
seen. And in the period of ED+10 the negative impact can be observed.
In case of excluded companies in the pre announcement period they have positive
returns, but between announcement day to effective date window there was a negative
returns on the stocks (-4.42 %). In the post effective window the returns are positive for
the excluded companies.
The findings of the study are
For included companies

Positive Cumulative Average Abnormal Returns of 1.13% are observed in the

window Announcement Day to Effective Day.

There were not much excess Cumulative Average Abnormal Returns (0.40%) in
post Effective window.

For Excluded companies

The Cumulative Average Abnormal Returns in pre announcement period was

positive
The Cumulative Average Abnormal Returns fell to -4.47 % in Announcement day

Effective day window period

The Cumulative Average Abnormal Returns improved in Post Effective window
to 2.79 %

Long Term Impact

To check the long term impact of the event I have calculated average returns for 1 year
pre & post of the event.

As per Exhibits 6 15 out of 20 included companies average returns have fell in post
event period compared to pre event period.
As per Exhibits 7 the average returns for 12 out of 23 excluded companies from CNX
Nifty has fell in post event period.

CHAPTER 5
CONCLUSION

The study examines price effects of inclusion and exclusion of constituent companies
from CNX Nifty index. The event study framework is used to find out the immediate
impact of CNX Nifty reorganization.
The hypotheses set for the study are rejected as there were excess returns in the pre
announcement window, announcement to effective day window and post event window.
The impact of inclusion/exclusion is simply a transitory event with no permanent
valuation effect; however the conclusions are not emphatic because of the lack of
abnormal volumes in the post effective day window (ED+10).
To conclude I would say that the included firms have a positive returns in between the
Announcement Day till the Effective Day, but as days pass the returns are reversed. For
excluded companies they may have negative returns after the announcement date but
they start improving in post effective date. The companies which are excluded from
CNX Nifty are continues to trade in market and get good returns too.

References

Brajesh Kumar1, Priyanka Singh2 (The Dynamic Relationship between Stock Returns,
Trading Volume and Volatility: Evidence from Indian Stock Market)
Dayanand Arora, Francis Xavier Rathinam (2010) Indias Experience during Current
Global Crisis: A Capital Account Perspective, Policy Research Institute, Ministry of
Finance, Japan, Public Policy Review, Vol.6, No.5, June 2010
Shleifer A. (1986). Do Demand Curves For Stock Slope Down? Journal of Finance 41, 3,
579- 590.
S S S Kumar (2009) Price and Volume Effects of S & P CNX CNX Nifty Index
Reorganizations, NSE research
Vijaya B M (2002) The Dynamics Around Sensex Reconstitutions, UTI Institute of
Capital Markets Conference Proceedings 2002
http://www.nseindia.com
http://in.finance.yahoo.com
http://www.moneycontrol.com
http://www.sebi.gov.in

Annexure
Exhibit 1: Sample size for CNX Nifty Index

AD
Total available
less : data not Available
Less : corporate action taken
Usable (Net Sample Size)

Additions
ED
27
6
1
20

AD
27
6
1
20

deletions
ED
27
1
3
23

Exhibit 2: Constituents of CNX Nifty with Weightage as On March 2013

Sr. No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Security
Symbol
ACC
AMBUJACEM
ASIANPAINT
AXISBANK
BAJAJ-AUTO
BANKBAROD
A
BHARTIARTL
BHEL
BPCL
CAIRN
CIPLA
COALINDIA
DLF
DRREDDY
GAIL
GRASIM
HCLTECH
HDFC
HDFCBANK
HEROMOTOC
O
HINDALCO
HINDUNILVR
ICICIBANK
IDFC
INFY

Security Name
ACC Ltd.
Ambuja Cements Ltd.
Asian Paints Ltd.
Axis Bank Ltd.
Bajaj Auto Ltd.

Weightag
e
(%)
0.65
0.8
1.07
2.33
1.46

Bank of Baroda
Bharti Airtel Ltd.
Bharat Heavy Electricals Ltd.
Bharat Petroleum Corporation Ltd.
Cairn India Ltd.
Cipla Ltd.
Coal India Ltd.
DLF Ltd.
Dr. Reddy's Laboratories Ltd.
GAIL (India) Ltd.
Grasim Industries Ltd.
HCL Technologies Ltd.
Housing Development Finance
Corporation Ltd.
HDFC Bank Ltd.

0.65
2.13
0.88
0.53
0.97
1.01
1.08
0.56
1.22
0.82
1.03
1.05

Hero MotoCorp Ltd.

Hindalco Industries Ltd.
Hindustan Unilever Ltd.
ICICI Bank Ltd.
IDFC Ltd.
Infosys Ltd.

0.88
0.7
2.51
6.61
1.02
7.73

6.44
6.3

27
1
3
23

26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

ITC
JINDALSTEL
JPASSOCIAT
KOTAKBANK
LT
LUPIN
M&M
MARUTI
NTPC
ONGC
PNB
POWERGRID
RANBAXY
RELIANCE
RELINFRA
SBIN
SESAGOA
SIEMENS
SUNPHARMA
TATAMOTORS
TATAPOWER
TATASTEEL
TCS
ULTRACEMC
49
O
50
WIPRO
Source: nseindia.com

I T C Ltd.
Jindal Steel & Power Ltd.
Jaiprakash Associates Ltd.
Kotak Mahindra Bank Ltd.
Larsen & Toubro Ltd.
Lupin Ltd.
Mahindra & Mahindra Ltd.
Maruti Suzuki India Ltd.
NTPC Ltd.
Oil & Natural Gas Corporation Ltd.
Punjab National Bank
Power Grid Corporation of India Ltd.
Ranbaxy Laboratories Ltd.
Reliance Industries Ltd.
Reliance Infrastructure Ltd.
State Bank of India
Sesa Goa Ltd.
Siemens Ltd.
Sun Pharmaceutical Industries Ltd.
Tata Motors Ltd.
Tata Power Co. Ltd.
Tata Steel Ltd.
Tata Consultancy Services Ltd.

8.88
0.74
0.45
1.37
4.07
0.77
2.21
0.99
1.06
3.06
0.58
0.81
0.32
7.36
0.31
2.96
0.33
0.25
1.66
2.8
0.84
1.25
4.26

UltraTech Cement Ltd.

Wipro Ltd.

1.04
1.2

Exhibit 3: CAR (in %) of Companies Included In CNX Nifty since 2006 2012 in
Pre Announcement, Announcement to Effective Date, and Post Effective Period.
The of the Companies
LUPIN
ULTRACEMCO
ASIANPAINT
BANKBARODA
COALINDIA
GRASIM

Securities Included
AD-10
-5.7566
(0.8916)
0.9855
(0.8430)
0.2356
(1.7343)
0.4648
(1.5734)
-0.1775
(1.8854)
0.6168
(1.1874)

AD-ED
3.4394
(1.7194)
4.9461
(1.3925)
8.5765
(1.6004)
-5.2461
(1.1659)
-12.2688
(2.1209)
2.7291
(1.0005)

ED+10
-6.7120
(2.0380)
2.2874
(1.5160)
3.7423
(1.1345)
-11.1891
(1.7804)
-7.4683
(2.0663)
-1.2317
(1.4623)

SESAGOA
DRREDDY
KOTAKBANK
JPASSOCIAT
IDFC
JINDALSTEL
AXISBANK
RELCAPITAL
DLF
CAIRN
UNITECH
NTPC
STER
SIEMENS

-14.4504
(2.8371)
-3.6368
(1.4122)
-8.4843
(0.9967)
-6.39614
(1.7570)
-7.1261
(1.8491)
-3.5401
(1.3632)
-3.6246
(2.4928)
1.8536
(1.9491)
-5.8013
(1.2895)
3.5694
(3.2606)
-53.8485
(16.8593)
3.4777
(1.2260)
1.5943
(3.2930)
8.5166
(0.5940)

-16.9152
(0.9353)
0.4772
(1.0338)
-5.3989
(1.5822)
-10.179
(2.3900)
-6.0864
(2.2244)
21.5595
(3.1565)
-10.1032
(3.0975)
-4.5959
-17.1607
(4.4836)
2.5605
(2.4490)
9.6968
(4.1799)
6.1803
(2.1225)
16.1125
(2.7242)
0.0281
(2.4877)

9.6876
(2.6738)
6.4568
(0.8345)
-6.1946
(1.3782)
-1.37581
(2.2357)
2.4735
(1.9698)
1.0190
(2.5110)
-2.9756
(2.6025)
-9.2290
(1.7447)
-5.5881
(3.5115)
13.3776
(1.5286)
-5.9859
(1.8571)
6.5377
(6.5377)
1.3008
(2.5035)
7.9043
(1.4468)

Source: authors compilation

Figures given in the parenthesis indicates standard deviation

Exhibit 4: CAR (in %) of Companies Excluded from CNX Nifty since 2006 2012
in Pre Announcement, Announcement to Effective Date, and Post Effective Period.
Name of the Company
SAIL
STER
RCOM
RPOWER
RELCAPITAL

Securities Excluded
AD-10
-2.0289
(0.9138)
1.1965
(1.9472)
3.1816
(2.1990)
14.6352
(4.1074)
-6.2375
(2.3406)

AD-ED
-2.5686
(1.8349)
-17.8903
(1.9150)
-20.4403
(1.6101)
-20.9198
(1.5657)
-14.9707
(3.8871)

ED+10
1.7848
(0.8052)
3.4152
(1.2501)
-1.7282
(1.6901)
-1.2728
(3.1232)
-2.2558
(1.7200)

SUZLON
UNITECH
IDEA
ABB
GRASIM
TATACOMM
NATIONALUM
ZEEL
SATYAMCOMP
DRREDDY
GLAXO
MTNL
HINDPETRO
DABUR
JETAIRWAYS
ORIENTBANK
SCI
TATACHEM

-1.4813
(2.7234)
6.4332
(2.2318)
-1.2928
(2.1761)
-4.2936
(1.1146)
1.3868
(1.6428)
-3.1928
(0.9630)
-2.6843
(1.7504)
21.4879
(5.2317)
9.9463
(6.8754)
-8.2548
(3.0330)
1.6272
(1.6298)
10.1260
(2.8248)
-5.4288
(1.2502)
1.9678
(1.9534)
-3.4809
(1.9585)
6.2004
(3.2068)
5.0694
(0.9854)
0.7468
(1.3945)

1.1295
(2.1310)
-7.1512
(1.7899)
-0.2172
(1.8159)
10.7930
(1.5269)
-2.0969
(0.9706)
-12.7255
(1.3703)
2.4934
(1.7335)
-19.4481
(3.5383)
-39.7657
-7.5054
(2.0492)
15.4193
(2.9626)
0.5866
(2.9186)
35.8689
(4.3639)
5.1565
(1.4214)
4.6110
(3.3436)
-8.6007
(2.4702)
1.1845
(2.9106)
-4.7855
(2.1883)

18.5830
(4.2433)
4.4917
(1.8489)
-0.3403
(1.4961)
-1.2290
(1.0832)
-1.0955
(0.5508)
-16.1710
(3.7088)
10.3217
(2.3335)
15.2442
(2.2822)
46.7903
(17.0463)
-5.9890
2.0453
1.8176
2.9846
-5.0932
(1.3055)
6.0290
(2.9587)
-0.0417
(1.8934)
0.7161
(2.6457)
2.8940
(2.1436)
-6.7466
(0.8993)
-5.8332
(1.9563)

Source: authors compilation

Figures given in the parenthesis indicates standard deviation

Exhibit 5 Cumulative Average Abnormal return (CAAR) for Included & Excluded
Companies

CAAR
AD-10
Securities Included
Securities Excluded
Source: authors compilation

AD-ED
-4.4336
1.9838

ED+10
1.1336
-4.4279

0.4006
2.7952

Exhibit 6: One Year Average Returns Before & After the Company Included In
CNX Nifty Index
Securities Included
The of the Companies
LUPIN
ULTRACEMCO
ASIANPAINT
BANKBARODA
COALINDIA
GRASIM
SESAGOA
DRREDDY
KOTAKBANK
JPASSOCIAT
IDFC
JINDALSTEL
AXISBANK
RELCAPITAL
DLF
CAIRN
UNITECH
NTPC
STER
SIEMENS

Returns Pre One year

Before
0.1206
0.1991
0.1195
-0.0091
0.0740
_
0.2206
0.2245
0.4535
0.2480
0.2385
0.0369
-0.3382
-0.5334
0.2756
0.1946
0.4128
0.1783
-0.0229
0.4598

Return Post One

year
0.0667
-0.0554
0.0931
0.0476
0.0454
_
-0.1473
0.0136
-0.1324
-0.2030
0.0541
-0.1585
0.3234
0.3329
-0.2420
-0.0651
-0.5817
-0.1199
0.2334
0.2154

Source: authors compilation

Exhibit 7: One Year Average Returns Before & After the Company Excluded In
CNX Nifty Index
Name of the Company

Securities Excluded
Returns Pre One year

Returns Post One

SAIL
STER
RCOM
RPOWER
RELCAPITAL
SUZLON
UNITECH
IDEA
ABB
GRASIM
TATACOMM
NATIONALUM
ZEEL
SATYAMCOMP
DRREDDY
GLAXO
MTNL
HINDPETRO
DABUR
JETAIRWAYS
ORIENTBANK
SCI
TATACHEM

Source: authors compilation

-0.0932
-0.1052
0.0851
0.0663
-0.1838
-0.1357
0.0090
-0.0009
0.0755
_
0.1147
0.0257
-0.4057
-0.2071
0.0177
-0.0413
0.0529
-0.0754
-0.0339
-0.0451
-0.0045
0.0356
0.2215

year
-0.1345
-0.0221
0.0258
-0.1010
0.0842
-0.2933
-0.3733
0.1565
-0.0407
_
-0.0640
0.0119
0.3962
0.4090
0.3292
0.0798
-0.3247
0.0054
-0.0826
-0.0638
0.1012
0.2527
0.1206