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 UNIVERSITYIn partial fulfillment of the award of the degree ofMASTER OF PHILOSOPHY (M.Phil.)(COMMERCE)BySanjeeta Vasant ShirodkarRoll No: co-1301Under the Guidance ofDr. Sriram Padyala

Department Of CommerceGoa 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 ShirodkarRoll No: CO-1301M.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 SHIRODKARM.Phil.SEMESTER IIGOA UNIVERSITYAPRIL 2013

INDEXSr. noContents Page No.

Chapter 1INTRODUCTION1-5

1.1Introduction1

1.2Literature review2

1.3Objectives and Scope of the Study3

1.4Data and Methodology3

1.5Limitations of the study5

Chapter 2INTRODUCTION TO CNX NIFTY6-10

2.1Introduction6

2.2Constituent of CNX Nifty6

2.3Sector wise representation 7

2.4Trends in CNX Nifty8

Chapter 3CNX NIFTY COMPOSITION11-13

3.1Calculating methodology11

3.2Script selection criteria11

3.2.1Liquidity (Impact Cost)11

3.2.2Floating Stock12

3.2.3Others (IPO, replacement of stock)13

3.3Reason for Replacement13

Chapter 4TEST RESULTS OF PRICE EFFECTS OF CNX NIFTY REORGANIZATION14-17

4.1Analysis of Cumulative Abnormal Returns (CAR) for all 3 windows14

4.2Analysis of Cumulative Average Abnormal Return (CAAR)16

Chapter 5Conclusion18

References19

Annexure 20-25

ANNEXUREList of exhibitsSr. noContentsPage no.

1Sample size for CNX Nifty Index

20

2Constituents Of CNX Nifty With Weightage As On March 2013

20

3CAR (in %) of Companies Included In CNX Nifty since 2006 2012 in Pre Announcement, Announcement to Effective Date, and Post Effective Period.21

4CAR (in %) of Companies Excluded from CNX Nifty since 2006 2012 in Pre Announcement, Announcement to Effective Date, and Post Effective Period.22

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

24

6One Year Average Returns Before & After the Company Included In CNX Nifty Index

24

7One Year Average Returns Before & After the Company Excluded In CNX Nifty Index

25

CHAPTER 1INTRODUCTION 1.1 INTRODUCTIONIn 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 securitiesThe 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 stocksHarris 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 findingsS 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 STUDYThis 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 METHODOLOGYSAMPLE 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 belowMETHODOLOGYIn 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 asR j, t = j + jR m, t + j, twhere 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 asAR j, t Rj, t j jR m, tIn 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 2INTRODUCTION 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 WEIGHTAGECompanys NameWeight (%)

I T C Ltd.9.29

Infosys Ltd.7.64

Housing Development Finance Corporation Ltd.6.99

Reliance Industries Ltd.6.96

ICICI Bank Ltd.6.61

HDFC Bank Ltd.6.28

Tata Consultancy Services Ltd.4.41

Larsen & Toubro Ltd.4.05

Oil & Natural Gas Corporation Ltd.3.02

State Bank of India2.93

Source: nesindia.comITC 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 REPRESENTATIONGraph 1: Sector Wise Representation of Constituents in Index

Source: nesindia.comFrom 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 NIFTYIf someone has entered in the Indian stock market anywhere during the Bull Run (2003-2007), 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

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 7th 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 27th 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 3CNX NIFTY COMPOSITION

3.1 CALCULATING METHODOLOGYCNX 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 VALUEThe 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 CRITERIAThe 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 CRITERIAThe 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 STOCKCompanies 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 ofsharesof apublicly-traded companyavailable totrade. It is important to note that this may be different from theshares outstanding: someshareholdersmay buy and hold, reducing the size of the float. The size of a floating supply greatly affects astock'svolatility. If it is small, any number ofactivitiescould affect greatly its price, especially a single largeorder tobuyorsellit. This would greatly alter the number of shares available to trade, creating too little or too muchsupplyand, therefore, drive thepriceup 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 afloat.

3.2.3. OTHERSa) 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 IndexStock 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 thestock market. One should have good idea about CNX Nifty indexand its role in the stock market.

CHAPTER 4TEST 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 WINDOWSH1: 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 (AD-ED)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 areFor 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 ImpactTo 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 5CONCLUSION

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 researchVijaya B M (2002) The Dynamics Around Sensex Reconstitutions, UTI Institute of Capital Markets Conference Proceedings 2002 http://www.nseindia.comhttp://in.finance.yahoo.comhttp://www.moneycontrol.comhttp://www.sebi.gov.in

AnnexureExhibit 1: Sample size for CNX Nifty IndexAdditionsdeletions

ADEDADED

Total available27272727

less : data not Available6611

Less : corporate action taken1133

Usable (Net Sample Size)20202323

Exhibit 2: Constituents of CNX Nifty with Weightage as On March 2013Sr. NoSecurity SymbolSecurity NameWeightage(%)

1ACCACC Ltd.0.65

2AMBUJACEMAmbuja Cements Ltd.0.8

3ASIANPAINTAsian Paints Ltd.1.07

4AXISBANKAxis Bank Ltd.2.33

5BAJAJ-AUTOBajaj Auto Ltd.1.46

6BANKBARODABank of Baroda0.65

7BHARTIARTLBharti Airtel Ltd.2.13

8BHELBharat Heavy Electricals Ltd.0.88

9BPCLBharat Petroleum Corporation Ltd.0.53

10CAIRNCairn India Ltd.0.97

11CIPLACipla Ltd.1.01

12COALINDIACoal India Ltd.1.08

13DLFDLF Ltd.0.56

14DRREDDYDr. Reddy's Laboratories Ltd.1.22

15GAILGAIL (India) Ltd.0.82

16GRASIMGrasim Industries Ltd.1.03

17HCLTECHHCL Technologies Ltd.1.05

18HDFCHousing Development Finance Corporation Ltd.6.44

19HDFCBANKHDFC Bank Ltd.6.3

20HEROMOTOCOHero MotoCorp Ltd.0.88

21HINDALCOHindalco Industries Ltd.0.7

22HINDUNILVRHindustan Unilever Ltd.2.51

23ICICIBANKICICI Bank Ltd.6.61

24IDFCIDFC Ltd.1.02

25INFYInfosys Ltd.7.73

26ITCI T C Ltd.8.88

27JINDALSTELJindal Steel & Power Ltd.0.74

28JPASSOCIATJaiprakash Associates Ltd.0.45

29KOTAKBANKKotak Mahindra Bank Ltd.1.37

30LTLarsen & Toubro Ltd.4.07

31LUPINLupin Ltd.0.77

32M&MMahindra & Mahindra Ltd.2.21

33MARUTIMaruti Suzuki India Ltd.0.99

34NTPCNTPC Ltd.1.06

35ONGCOil & Natural Gas Corporation Ltd.3.06

36PNBPunjab National Bank0.58

37POWERGRIDPower Grid Corporation of India Ltd.0.81

38RANBAXYRanbaxy Laboratories Ltd.0.32

39RELIANCEReliance Industries Ltd.7.36

40RELINFRAReliance Infrastructure Ltd.0.31

41SBINState Bank of India2.96

42SESAGOASesa Goa Ltd.0.33

43SIEMENSSiemens Ltd.0.25

44SUNPHARMASun Pharmaceutical Industries Ltd.1.66

45TATAMOTORSTata Motors Ltd.2.8

46TATAPOWERTata Power Co. Ltd.0.84

47TATASTEELTata Steel Ltd.1.25

48TCSTata Consultancy Services Ltd.4.26

49ULTRACEMCOUltraTech Cement Ltd.1.04

50WIPROWipro Ltd.1.2

Source: nseindia.com

Exhibit 3: CAR (in %) of Companies Included In CNX Nifty since 2006 2012 in Pre Announcement, Announcement to Effective Date, and Post Effective Period.Securities Included

The of the CompaniesAD-10AD-EDED+10

LUPIN

-5.75663.4394-6.7120

(0.8916)(1.7194)(2.0380)

ULTRACEMCO

0.98554.94612.2874

(0.8430)(1.3925)(1.5160)

ASIANPAINT

0.23568.57653.7423

(1.7343)(1.6004)(1.1345)

BANKBARODA

0.4648-5.2461-11.1891

(1.5734)(1.1659)(1.7804)

COALINDIA

-0.1775-12.2688-7.4683

(1.8854)(2.1209)(2.0663)

GRASIM

0.61682.7291-1.2317

(1.1874)(1.0005)(1.4623)

SESAGOA

-14.4504-16.91529.6876

(2.8371)(0.9353)(2.6738)

DRREDDY

-3.63680.47726.4568

(1.4122)(1.0338)(0.8345)

KOTAKBANK

-8.4843-5.3989-6.1946

(0.9967)(1.5822)(1.3782)

JPASSOCIAT

-6.39614-10.179-1.37581

(1.7570)(2.3900)(2.2357)

IDFC

-7.1261-6.08642.4735

(1.8491)(2.2244)(1.9698)

JINDALSTEL

-3.540121.55951.0190

(1.3632)(3.1565)(2.5110)

AXISBANK

-3.6246-10.1032-2.9756

(2.4928)(3.0975)(2.6025)

RELCAPITAL

1.8536-4.5959-9.2290

(1.9491)(1.7447)

DLF

-5.8013-17.1607-5.5881

(1.2895)(4.4836)(3.5115)

CAIRN

3.56942.560513.3776

(3.2606)(2.4490)(1.5286)

UNITECH

-53.84859.6968-5.9859

(16.8593)(4.1799)(1.8571)

NTPC

3.47776.18036.5377

(1.2260)(2.1225)(6.5377)

STER

1.594316.11251.3008

(3.2930)(2.7242)(2.5035)

SIEMENS

8.51660.02817.9043

(0.5940)(2.4877)(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.Securities Excluded

Name of the CompanyAD-10AD-EDED+10

SAIL

-2.0289-2.56861.7848

(0.9138)(1.8349)(0.8052)

STER

1.1965-17.89033.4152

(1.9472)(1.9150)(1.2501)

RCOM

3.1816-20.4403-1.7282

(2.1990)(1.6101)(1.6901)

RPOWER

14.6352-20.9198-1.2728

(4.1074)(1.5657)(3.1232)

RELCAPITAL

-6.2375-14.9707-2.2558

(2.3406)(3.8871)(1.7200)

SUZLON

-1.48131.129518.5830

(2.7234)(2.1310)(4.2433)

UNITECH

6.4332-7.15124.4917

(2.2318)(1.7899)(1.8489)

IDEA

-1.2928-0.2172-0.3403

(2.1761)(1.8159)(1.4961)

ABB

-4.293610.7930-1.2290

(1.1146)(1.5269)(1.0832)

GRASIM

1.3868-2.0969-1.0955

(1.6428)(0.9706)(0.5508)

TATACOMM

-3.1928-12.7255-16.1710

(0.9630)(1.3703)(3.7088)

NATIONALUM

-2.68432.493410.3217

(1.7504)(1.7335)(2.3335)

ZEEL

21.4879-19.448115.2442

(5.2317)(3.5383)(2.2822)

SATYAMCOMP

9.9463-39.765746.7903

(6.8754)(17.0463)

DRREDDY

-8.2548-7.5054-5.9890

(3.0330)(2.0492)2.0453

GLAXO

1.627215.41931.8176

(1.6298)(2.9626)2.9846

MTNL

10.12600.5866-5.0932

(2.8248)(2.9186)(1.3055)

HINDPETRO

-5.428835.86896.0290

(1.2502)(4.3639)(2.9587)

DABUR

1.96785.1565-0.0417

(1.9534)(1.4214)(1.8934)

JETAIRWAYS

-3.48094.61100.7161

(1.9585)(3.3436)(2.6457)

ORIENTBANK

6.2004-8.60072.8940

(3.2068)(2.4702)(2.1436)

SCI

5.06941.1845-6.7466

(0.9854)(2.9106)(0.8993)

TATACHEM

0.7468-4.7855-5.8332

(1.3945)(2.1883)(1.9563)

Source: authors compilation Figures given in the parenthesis indicates standard deviation

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

AD-10AD-EDED+10

Securities Included-4.43361.13360.4006

Securities Excluded1.9838-4.42792.7952

Source: authors compilation

Exhibit 6: One Year Average Returns Before & After the Company Included In CNX Nifty IndexSecurities Included

The of the CompaniesReturns Pre One year BeforeReturn Post One year

LUPIN0.12060.0667

ULTRACEMCO0.1991-0.0554

ASIANPAINT0.11950.0931

BANKBARODA-0.00910.0476

COALINDIA0.07400.0454

GRASIM__

SESAGOA0.2206-0.1473

DRREDDY0.22450.0136

KOTAKBANK0.4535-0.1324

JPASSOCIAT0.2480-0.2030

IDFC0.23850.0541

JINDALSTEL0.0369-0.1585

AXISBANK-0.33820.3234

RELCAPITAL-0.53340.3329

DLF0.2756-0.2420

CAIRN0.1946-0.0651

UNITECH0.4128-0.5817

NTPC0.1783-0.1199

STER-0.02290.2334

SIEMENS0.45980.2154

Source: authors compilation

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

Name of the CompanyReturns Pre One yearReturns Post One year

SAIL-0.0932-0.1345

STER-0.1052-0.0221

RCOM0.08510.0258

RPOWER0.0663-0.1010

RELCAPITAL-0.18380.0842

SUZLON-0.1357-0.2933

UNITECH0.0090-0.3733

IDEA-0.00090.1565

ABB0.0755-0.0407

GRASIM__

TATACOMM0.1147-0.0640

NATIONALUM0.02570.0119

ZEEL-0.40570.3962

SATYAMCOMP-0.20710.4090

DRREDDY0.01770.3292

GLAXO-0.04130.0798

MTNL0.0529-0.3247

HINDPETRO-0.07540.0054

DABUR-0.0339-0.0826

JETAIRWAYS-0.0451-0.0638

ORIENTBANK-0.00450.1012

SCI0.03560.2527

TATACHEM0.22150.1206

Source: authors compilation