Possible Exits from Nifty Next50: D-Mart, Varun Beverages, Zomato, and More. Find Out Why

The National Stock Exchange (NSE) recently launched a consultation in which it proposed excluding non-F&O firms from the Nifty Next 50 index by modifying the stock selection mechanism.

After eliminating the firms in the benchmark Nifty 50, the Nifty Next 50 index reflects 50 stocks from the Nifty 100 index.

The Next 50 Index contains 11 equities that are not available in the F&O segment. As of May 16, these stocks had a cumulative weight of 9.05% in the index. These 11 stocks are Varun Beverages, Adani Green, Zomato, Adani Transmission, Nykaa, Adani Wilmar, Adani Total Gas, P&G Hygiene, Bajaj Holdings, Life Insurance Corp, and DMart.

According to Nuvama Institutional Equities, passive fund managers are increasingly concerned about tracking inaccuracy since some non-F&O components have historically been at limit down, on or around index rejig days.

As a result, fund managers are finding it difficult to reflect changes in the Nifty Next 50 index or ETF schemes.

“The exposure of the index to such non-F&O stocks frequently hitting the price bands lowers the ability to replicate the index portfolio efficiently and thus increases the tracking error,” stated Nuvama.

Only include equities in the Nifty Next 50 that are accessible for F&O trading is one option to address the index replication issue. The liquidity and accessibility of stocks that are eligible for F&O trading are often greater than those that are not. Only including equities in the Nifty Next 50 index that are eligible for F&O trading, according to the brokerage, would make it simpler for passive funds to replicate the index.

The deadline for submitting consultation input is June 10. Soon after the deadline expires, the index committee is anticipated to reveal the final changes.

In order to move seamlessly to the above-proposed strategy for the Nifty Next 50 index, the exchange proposes to apply the adjustments in two stages.

The cumulative weight of non-F&O equities in the Nifty Next 50 index is expected to decrease under phase 1 from 10% to 5%. In actuality, F&O companies would comprise 95% of the index’s total weight while non-F&O firms would make up 5%.

Phase 2 of the exchange’s planned adjustments to the index’s stock selection technique will essentially limit the eligible equities for inclusion in the index to those that may be traded in the NSE’s F&O sector. Stocks from the Nifty Midcap 50 shall be chosen in cases of deficit numbers if

their six-month average market cap is at least 1.5 times that of the most minor index components that are currently in place at the time of review.

According to Nuvama, this is only a consultation and the exchange may announce the final implementation by the third week of June.