It is apparent that no amount of restructuring of the index would resolve the above mentioned problem, and BSE could have either made its index a more broad-based one or introduced a separate index for technology stocks. While a broader-based index would have automatically reduced the weightage of the top scrips, the technology index would put market cap heavyweights such as Infosys and Zee Telefilms in thesame league as non-index heavyweights such as Wipro and HCL Technologies. However, it is easy to see why BSE has refrained from taking these decisions. It simply does not want to tinker with its already existing model, as it is one of the oldest and most widely recognised stock market indices in India. Moreover, just as the Dow Jones Industrial Average, the composition of the index simply does not affect the wide acceptance of the index.

In fact, the Dow is built on an equally weighted model other than the norm of market cap weighted models. In an equally weighted model, the index is calculated on the basis of the closing prices of the underlying components rather than its market cap. Thus, a $1 rise in a $100 scrip and a $ 1 scrip would have the same effect on the index. Despite this, it continues to be the most widely accepted barometer of the US stock markets. Putting it simply, the advantage both the Dow and the Sensex enjoy is that they are among the oldest indices and are widely accepted.

Gettingback to the changes in the index, BSE seems to have adopted only market cap as a criterion for selection. Though, the four included scrips enjoy high liquidity on the bourses, some of the existing scrips do not. For example, Novartis's average trading volume in this month was only about 14500 shares per day. One might suggest that pharma stocks were out of favour after the budget, but volumes in the previous month were not much better averaging 15100 shares per day. The problem of having illiquid scrips such as Novartis in the index is that it results in high bid-ask spreads, which increase impact/transaction costs. Impact costs matter when (a) an index fund tries to replicate the movement of the index in its fund and (b) an arbitrageur tries to buy or sell the index to correct the discrepancy between the spot price of the index and its futures price based on the cost-of-carry model.

Besides, the representation of different industries in the index seems unsatisfactory. Financial institutions will representhardly 5 per cent of the revamped index after the exclusion of IDBI. The inclusion of Satyam and RPL is surprising as these sectors are already well represented. Moreover, this has resulted in only three-four industries having a considerable weightage. The only saving grace on this count is the inclusion of Zee and the media industry.

Hepatitis-B vaccines
The next couple of years could see the drug market flooded with Hepatitis-B vaccines. It seems we are to witness a repeat of what had earlier happened to Pennicillin-G.

In the middle of the last decade, many new plants had commenced production of Pennicilin-G with a capital outlay of more than Rs 700 crore, which finally ended in an oversupply scenario. Presently, against the targeted demand of 5590 MMU of Pennicillin-G, the production has exceeded 6400 MMU. The oversupply scenario over the last four years has crashed the price of Pennicillin G from $ 14 per BU in 1997 to $ 8.3 per BU in 1999. The market prices are likely to decline further inthe current fiscal. Even at current prices, manufacturers are not able to make operating profits. The situation is worse for major manufacturers like J.K Pharmachem which have nearly lost their net worth.

The situation is likely to repeat with the Hepapitis-B vaccines because many new entrants are rushing to put up new manufacturing facilities. Cadila is putting up a Hepapitis-B vaccine plant at Moraiya, Ahmedabad and likely to start production this month. Wockhardt Life Sciences is also putting up a Rs 50 crore plant in Aurangabad in collaboration with Rhein Biotech, Germany. Chiron Behring Vaccines P Ltd, USA ( a foreign company) is also likely to commence production in a month or two at Ankleshwar. Their domestic co-promoter is Hoechst Marion India. In addition, Transqene Bioteck has also put up a plant for Hepapitis and was expected to commence production in December 1999.

The total capital expenditure in these plants is likely to exceed Rs 220 crore. Presently, there are more than fifteenmanufacturers of Hepatitis-B but most of them have not made a success of it. According to Shruti Gosavi, a pharma specialist, there are only one or two brands in the market. The most common brand is Engerix-B from SmithKline Beechem which enjoys a near monopoly with more than 70 per cent market share, the second most popular brand being Heppacine-B from Bharat Serum. She says that although there are many manufacturers like Shanta Biotech, Haffkins, Serum Institute, their products are not available in the market. This is mainly because their marketing strength is not focussed on this product. Therefore, when we have an large number of existing manufacturers who hardly enjoy any market share, will the new entrants survive in the market? The problems may be further compounded when the generic molecule or new line extension replace the existing molecule.

Emcee (with contributions from Mobis Philipose and Dhruv Rathi)