Nifty Next 50 Rejig Soon; D-Mart, Varun Beverages, Zomato, Nykaa To Be Removed?

"The exposure of the index to such non-F&O stocks lowers the ability to replicate the index portfolio efficiently," says Abhilash Pagaria, head of alternative and quantitative research at Nuvama, further stating that the frequency with which the non-F&O stocks hit the price bands increases the tracking error.

To solve this problem of index replication, the NSE has floated a consultation paper that will only include those stocks in the Nifty Next 50 index that are available for F&O trading, as they are typically more liquid and accessible than other stocks that are not available for F&O trading. This will improve the ease of replication of the index by passive funds.

In order to facilitate a smooth transition, the exchange plans to implement the deletion in two phases.

Phase I: Reduce the cumulative weight of non-F&O stocks to 5% from the existing 10%; set to be in effect after market close on June 29.

Phase II: Reduce the remaining 5% weightage, to be in effect post-market close on Sept. 28.

In the event that the NSE falls short of companies, it will select companies from the Nifty Midcap 50 on the basis that their six-month average market cap is at least 1.5x that of the most minor index constituents at the time of review.

A provision to avoid exclusion has been suggested in case derivatives are introduced for the presently non-F&O members by August 23.

Nuvama stated that while suggestions are open in response to the discussion paper till June 10, the potential final implementation could be announced by the third week of the month, according to the Nuvama note.