MC Explains | How are stocks chosen to join the Nifty 50 index?

Only stocks in the derivatives segment can join the Nifty 50.

After joining the 30-pack Sensex last December, food delivery giant Zomato might soon enter another major league: the NSE Nifty 50! And it’s not alone. Reliance Industries’ newly spun-off financial arm, Jio Financial Services, might also make its debut on this benchmark index!

Meanwhile, brokerage firm JM Financial predicts that FMCG player Britannia Industries and oil marketing giant Bharat Petroleum Corporation Limited may be excluded, in the March Nifty 50 rejig

If this happens, passive mutual funds and ETFs tracking the Nifty 50 will buy Zomato shares worth $620 million and Jio Financial shares worth $356 million.

On the other hand, the exclusion of BPCL and Britannia could lead to outflows of $212 million and $229 million, as the same funds will have to sell shares of these firms in order to effectively track the index.

Let’s take a look at how stocks are chosen to be a part of the Nifty 50 index.

The Nifty 50 index is reshuffled twice every year, based on six-month data ending January 31 and July 31. The changes to the index are then made in March and September.

To decide the stocks that enter the Nifty 50 index, NSE looks at the average free-float market capitalisation for the six months.

Free-float market cap refers to the market value of shares readily available for trading by the public, excluding promoters' holdings and other restricted shares.

Let’s take the example of stock A and stock B. Imagine that Stock A’s total market cap is Rs 1 lakh crore, but the promoters hold 50%. This makes the free-float market cap Rs 50,000 crore.

Stock B’s total market cap is Rs 80,000 crore, while the promoters hold only 30 percent. This makes the free-float market cap for this counter Rs 56,000 crore.

If the index provider had to pick one of these stocks to join the index, even though stock A’s total market-cap is higher, stock B would join the index because of its free-float market capitalisation.

This method ensures that the Nifty 50 represents the most liquid and stable stocks in the market.

Don’t forget that NSE also takes into account the average of the free-float market-cap for six months, in order to ensure consistent performance and not see much of an impact from short-term spikes or falls in market price.

Recent data shows Zomato and Jio Financial Services have significantly higher free-float market caps than BPCL and Britannia.

In the previous rejig, which came into effect on September 30, 2024 Bharat Electronics and Tata Group’s Trent Limited made it to the Nifty 50 index. IT giant LTI Mindtree and pharma major Divi’s Laboratories were replaced by the two new entrants in the benchmark index.

According to the regulations, only stocks that are included in the derivatives segment, meaning F&O contracts are available to trade on these counters, can join the Nifty 50.

In November 2024, the stock exchanges expanded their futures and options (F&O) segment, adding 45 stocks to the list of available stocks to trade in the derivatives segment, which included Zomato and Jio Financial Services.

However, this update isn’t confirmed yet, it is based on speculation from brokerages. The NSE will confirm the details of the reshuffle in February, with the changes effective from March 31, 2025.