Tuesday, 6 December 2011

Stock Market Index in India (Part II)

We reviewed the origins of the Bombay Stock Exchange, in my previous post.  Established in 1986, the BSE SENSEX is the key barometer of the Indian Stock Markets and is widely quoted as a proxy for the overall Indian Equity markets.  When it was first established in 1986, the SENSEX comprised of stocks that were representative of the then pre-dominant companies and sectors.  Over the years the Indian economy has successfully completed its transition from a manufacturing basis, to a service oriented economy and now more recently biased towards a knowledge economy.  Several of the companies that were considered the bellwethers of the old economy are no longer part of the index, since the economy and concurrently their fortunes have changed in a large way.  A historical review of these changing times is critical to understand the fickle nature of individual stock investments, while learning to appreciate the stability offered by the index in itself.

When first established in 1986, the SENSEX comprised of the 30 key stocks that best represented the Indian economy of the time.  Names like Zenith Ltd, Ballarpur Industries Ltd, and Hindustan Motors, represented the cream of the Indian manufacturing sector, and hence were included in the 30 strong SENSEX.  Here is a listing of the BSE SENSEX from when it was first established.  How many of the companies on the list, can you recognise as household names today?  It is amazing that in a relatively short period of 25 years several companies that were considered as the shining stars of the economy at that time, are no longer familiar to investors, or have even ceased to exist.  How many of us own Mukand Iron and Steel Works Limited in our portfolios today?  Do we even know that this company was established in 1937, and that Mahatma Gandhi himself intervened in 1939 to have Jamnalal Bajaj and Jeevanlal Motichand to take over the company from Lala Mukand Lal, after whom the company is still named?  How many of us encourage our kids to consider joining Premier Automobiles, or Zenith India Limited, when they grow up? 

To provide some perspective on the time scale here, remember that the oldest stock exchange in the world, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company (another connection to India!) for dealings in its printed stocks and bonds.  So even with the much shorter time scale of the BSE SENSEX you can get an idea of the upheaval that markets can undergo with the changing fortune of economies and specific companies.

The early days of the SENSEX are an interesting case study.  Since the index was established in 1986, but backdated to 1978-79, the SENSEX had the same set of constituents from 1978-1986.  With the base set at 100 in 1978, the SENSEX debuted at 549 on April 1st, 1986.  For the next 10 years, there was no change in the SENSEX components (with the exception of Zenith India Ltd, which was dropped and replaced by Bharat Forge Ltd in 1992) even though there were substantial changes to the universe of large liquid companies.  As a result, by the time we got to the 1993-96 timeframe, it is debateable if the index was truly a good measure of the Indian economy of the time.  We will see in my next post, how this was rectified and the SENSEX again became an accurate barometer of the Indian stock market.


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