A. Transparent, Non-discretionary Rules drive Inclusion/Exclusion of stocks in ASM
1. NSE surveillance actions on eligible stocks are applicable as per transparent rules. These rules are non-discretionary, pre-announced, and automatically applicable.
2. Inclusion or exclusion of stocks under Additional Surveillance Measures (ASM) and other trading activity-based specific rules like price bands, trade for trade (T2T), etc, are based on parameters that consider price volatility, volumes, market capitalization, client concentration, liquidity parameters, etc. The exact parameters along with the duration of applicability have been in the public domain and have been applied consistently.
3. Common across exchanges, these rules are implemented automatically and no human discretion is allowed. These rules and review periods are also pre-announced to the market. The actions which result from these pre-announced rules are available in the public domain and are applied without discretion to all the stocks which attract the specific clauses of such rules.
4. This entire framework has been time-tested. Further, any changes to the said rules are also pre-announced before any future action on basis of new rules becomes applicable. Process Audits and periodic inspections are undertaken to ensure compliance with the parameters defined. The actions are applied in an automated way and no exceptions are allowed. Rules, actions, durations, etc are available on www.nseindia.com.
B. Transparent, Non-discretionary Rules drive Inclusion/Exclusion of stocks in indices
1. Similarly, the inclusion and exclusion of stocks in various Nifty indices on a periodic basis have been as per transparent policies. All Nifty indices are maintained by NSE Indices Limited (NSE Indices), a subsidiary of NSE, and are based on index methodologies that are objective, non-discretionary, rules-based, pre-announced, and transparent. The index criteria for including any stock into an index or excluding any existing stock from an index is well defined, documented, and made available on NSE and NSE Indices website (www.nseindia.com and www.niftyindices.com). The specific methodology for each Nifty index may be different based on the objective of the index and the underlying market that the index seeks to represent. For example, the inclusion of stocks in Nifty 50, India’s flagship index, is based on free-float market capitalization, impact cost, trading frequency, and availability of stock for trading in F&O segment of the exchange.
2. NSE Indices, are compliant with IOSCO’s Principles for Financial Benchmarks and follow a strong index governance practice through various governance committees to monitor index criteria policy changes or policies related to index constituent changes. These committees also include external independent members. All changes in policies relating to constituents of any indices are approved by such index governance committees. The rules are applied automatically without human discretion. Further, the results of such automatic rules-based reviews are also announced long before implementing the changes, if any, in the indices.
3. Once the index criteria have been crystallized, NSE Indices or its committees exercise no human discretion in deciding on the inclusion or exclusion of stocks in any of if its indices. Based on the well-defined index criteria available on NSE and NSE Indices website, market participants are able to predict the changes in index constituents in various indices in the upcoming index review.
Thus given the current pre-announced, transparent, rules-based, automatic, nondiscretionary regulatory framework for surveillance measures and for index inclusion/ exclusion at NSE, no human discretion is possible for anyone and this entire process and practice has been running for decades.
The overall Risk Management Framework put in place for trading in the secondary market has been designed to provide robustness to a capital market ecosystem, especially in volatile times.
Over the last 3 decades, Indian stock exchanges have evolved into world-class, modern, screen-based, rule-based, fair, efficient, transparent, and orderly markets. Regulatory frameworks over these 3 decades have also evolved to facilitate a wide spectrum of participants from India and abroad with confidence and certainty.