Introduction

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) categorize their stocks based on various factors. These include turnover, market capitalisation, and corporate governance. Learning about categorization and picking stocks from specific groups helps with risk management.

BSE classifies the equity shares listed on it into various groups, including ‘A,’ ‘T,’ ‘S,’ ‘Z,’ and ‘B.’

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What are group A stocks?

Group A contains some of the most liquid stocks among all those listed. This group has a high trading volume and fulfils the compliances of the exchange. The stock trades for group A come under the regular rolling settlement process. Group A shares are considered safe for investing and trading purposes. They score more on parameters like liquidity compared to group B.

A company can enter the category only if it has traded for at least 98% of the trading days in the past three months. Currently, over 300 companies are part of Group A. The top stocks based on market capitalization within the BSE A group include Reliance Industries, HDFC Bank, TCS, ICICI Bank, and Infosys.

Criteria for Group A classification

1. All companies included in group A undergo a review. Suppose the Department of Surveillance & Supervision (DOSS) objects to any listed mutual funds, scrips, or companies trading under the permitted category at BSE. In that case, it is removed from the ambit of classification in group A.

2. The company must have been listed for at least three months to qualify for group A. But there are exceptions to this rule:

   1. A company listed after any corporate action that involves arrangement for capital restructuring, demerger, merger, etc.
   2. A company with permission to trade in the futures & options segment since its listing date

3. The minimum non-promoter holding based on the shareholding pattern of the most recent quarter should be 10%. This criterion does not apply to Public Sector Undertakings (PSU).

4. The final rank will give a weightage of 75% and 25% to three-monthly average market capitalisation and traded turnover, respectively.

Scoring mechanism to shortlist companies in Group A

The DOSS reviews companies to give out scores based on the following mechanism:

• Average free-float market capitalisation - 50%
• Average turnover on both exchanges - 25%
• Compliance monitoring - 10%
• Corporate governance - 10%
• Responsible investment - 5%

The first two parameters are for the last quarter. The score for corporate governance and responsible investment is extracted from the last annual report submitted by the company. The final score is the sum of all these parameters.

Hierarchy for selecting companies in Group A

After a list is derived based on the final rank, it is screened for investigation and compliance. The following hierarchy is followed while selecting the top 200 companies for group A.

1. All companies in the top 200 consecutively for the last three quarters are added to group A.
2. If the list prepared in (a) has less than 200 companies, it will consider the companies ranking in the top 200 for the last two quarters.
3. If the list derived in (a) and (b) comprises less than 200 companies, it will include those with a final rank within the top 200 in the current quarter.

Other groups in BSE

BSE's other classification groups include ‘T,’ ‘Z,’ ‘B,’ and ‘S.’ Group T lists stocks that are settled on a trade-to-trade basis. You cannot execute intraday trades on these shares, and they include a 5% circuit limit.

Group Z comprises companies that haven’t fulfilled the compliances of the exchange. Moreover, it includes companies that haven’t resolved investor complaints or made the prerequisite requirements with the depositories to dematerialise their securities.

Group S includes small and medium-sized companies. These aren’t well-known, and their shares are not as liquid as those in Group A and Group B. Since the companies are small, there is a risk that they will not be able to handle crises as efficiently as more prominent companies. The share volume and liquidity are low, with frequent frantic price fluctuations.

Companies not included in the groups mentioned above fall in group B. These shares fall under the rolling settlement system and see average trading volumes.

Conclusion

BSE has categorised its scripts in the equity segment into different groups based on quantitative and qualitative factors. The main groups are ‘A,’ ‘B,’ ‘T,’ ‘S,’ and ‘Z.’ The categorisation enables you to understand the risk a stock can carry. Group A consists of the top-performing companies. These stocks are highly liquid with high trading volume.

Motilal Oswal facilitates investing in stocks from all groups on BSE.

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