NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Introduction to Securities Markets

Market Indices and Regulatory Framework for NISM PMS Distributors

Updated 11 October 2026 · Fact-checked

A market index tracks a basket of shares with one number, usually weighted by free-float market capitalisation. Sensex covers 30 BSE stocks and Nifty 50 covers 50 NSE stocks. SEBI regulates securities markets, while RBI regulates banks, money markets and government securities. Learn who does what and how an index moves.

Understand Market Indices and Regulatory Framework

A stock market index is a single number that shows how a chosen group of shares is performing. If the index rises, the group has gained value overall. It works as a market barometer and as a benchmark against which a portfolio manager's returns are compared.

The two best-known Indian indices are the S&P BSE Sensex (BSE, 30 large companies) and the Nifty 50 (NSE, 50 large companies). Both are free-float market capitalisation weighted. Free-float means only shares available for public trading are counted, not shares held by promoters or the government. A company with a bigger free-float market cap has a bigger weight and moves the index more.

The index value is not a simple sum of prices. It is the current free-float market cap of the basket divided by the base-period market cap, multiplied by the base value. This lets the index stay comparable when companies are added, removed or change their share count. Sensex has a base value of 100 for 1978-79 and Nifty 50 has a base value of 1000 for the base date of 3 November 1995. Do not confuse these base figures with current index levels.

Now the regulators. SEBI (Securities and Exchange Board of India) was set up to protect investors, promote the development of the securities market and regulate it. It was given statutory status by the SEBI Act, 1992. It has quasi-legislative (makes regulations), quasi-judicial (passes orders) and quasi-executive (inspects, investigates) powers. Portfolio managers, mutual funds, stock exchanges, depositories and brokers are all regulated by SEBI.

RBI (Reserve Bank of India) is the central bank. It regulates banks, the money market, the government securities market and foreign exchange (under FEMA), and sets monetary policy. Other bodies include the Ministry of Finance and the Ministry of Corporate Affairs, which administers the Companies Act. For the exam, link each body to its area and do not mix them up.

Key formulas to remember

Index value: Index = (Current free-float market cap of basket ÷ Base market cap) × Base value; Used by Sensex and Nifty 50. Weights come from free-float market cap, not price.
Free-float market cap: Free-float market cap = Share price × Number of free-float shares; Free-float shares exclude promoter and other locked-in holdings.
Free-float market cap (using factor): Free-float market cap = Price × Total shares × Free-float factor; Free-float factor is the fraction of shares available to the public, between 0 and 1.
Index return: Index return (%) = (Closing level − Opening level) ÷ Opening level × 100; Price index return excludes dividends. Total return indices include them.
Index sizes: Sensex = 30 stocks (BSE); Nifty 50 = 50 stocks (NSE); Frequent direct MCQ.

How to solve Market Indices and Regulatory Framework questions

Questions on this topic are either calculation questions about index values or recall questions about who regulates what. Use this method for both.

1Read the question and decide: is it an index calculation, an index feature, or a regulator question?
2For index features, recall the key words: free-float, market capitalisation weighted, BSE for Sensex, NSE for Nifty.
3For calculations, find the free-float market cap of each stock and the total for the basket.
4Apply the formula: new index = (new market cap ÷ base market cap) × base value, or use index return for percentage change.
5For regulator questions, match the activity to the body: SEBI for securities market, RBI for banks and money market, MCA for companies.
6Check each option against the exact words of the question and eliminate those with the wrong exchange, wrong number of stocks or wrong regulator.
7Re-check arithmetic before choosing your answer.

Quickest way: Match and eliminate

When to use it: Use this for recall questions in the time-pressured online test.

Link Sensex to BSE and 30, Nifty to NSE and 50.
Link SEBI to securities markets and investor protection, RBI to banks, money market and monetary policy.
For a calculation, find the ratio new cap ÷ old cap and multiply by the old index level.
Cross out any option that contradicts these links, then pick the remaining one.

Common mistakes in Market Indices and Regulatory Framework

Saying Sensex is an NSE index or Nifty belongs to BSE.
Both names are used together and the exchanges sound alike.
Fix: Remember S for Sensex and BSE as the older pair, and Nifty with NSE (National Stock Exchange).
Believing the index is calculated from share prices alone.
People picture the index as an average of prices.
Fix: The weights are free-float market caps. A high-priced small company can matter less than a lower-priced large one.
Counting promoter holdings in the index weight.
Full market cap is easier to remember than free-float market cap.
Fix: Free-float excludes promoter and other non-tradable holdings.
Assigning RBI the power to regulate stock exchanges and portfolio managers.
RBI is seen as the main financial regulator.
Fix: Securities market intermediaries, including portfolio managers, are regulated by SEBI. RBI covers banks, money market and government securities.
Treating SEBI's powers as only advisory.
Students overlook that SEBI has statutory powers.
Fix: Remember the three types: quasi-legislative, quasi-judicial and quasi-executive.

Worked examples

Example 1

A basket has two stocks. Stock A: price ₹200, 10,00,000 total shares, free-float factor 0.60. Stock B: price ₹500, 4,00,000 total shares, free-float factor 0.50. The base market cap is ₹2,00,00,000 and the base value is 1000. What is the index value?

Show the solution

Stock A free-float shares = 10,00,000 × 0.60 = 6,00,000.
Stock A free-float market cap = 200 × 6,00,000 = ₹12,00,00,000.
Stock B free-float shares = 4,00,000 × 0.50 = 2,00,000.
Stock B free-float market cap = 500 × 2,00,000 = ₹10,00,00,000.
Total = ₹22,00,00,000.
Index = (22,00,00,000 ÷ 2,00,00,000) × 1000 = 11 × 1000 = 11,000.

Answer: 11,000

Example 2

Which body regulates portfolio managers and other securities market intermediaries in India: (a) RBI (b) SEBI (c) Ministry of Corporate Affairs (d) IRDAI?

Show the solution

Portfolio managers deal with securities, so the regulator is the securities market regulator.
RBI covers banks, money market and government securities, so (a) is wrong.
MCA administers the Companies Act, so (c) is wrong.
IRDAI regulates insurance, so (d) is wrong.
SEBI registers and regulates portfolio managers.

Answer: (b) SEBI

Exam tips

Memorise the pairs: Sensex-BSE-30 and Nifty 50-NSE-50. These appear often as direct questions.
For index questions, look for the words free-float and market capitalisation weighted in the correct option.
The PMS Distributors exam has negative marking of 10% of the marks for a question, so eliminate options and guess only when you can narrow to two.
Always match the activity to the regulator: securities market to SEBI, banks and monetary policy to RBI.
In calculations, compute the ratio first to catch obvious errors.

Practice questions from Introduction to Securities Markets

Market Indices and Regulatory Framework: frequently asked questions

How is the Nifty 50 index calculated?

It uses the free-float market capitalisation weighted method. The current free-float market cap of the 50 stocks is divided by the base market cap and multiplied by the base value of 1000. Stocks with higher free-float market cap have more influence.

What is the difference between Sensex and Nifty?

Sensex is the BSE index of 30 stocks and Nifty 50 is the NSE index of 50 stocks. Both use free-float market capitalisation weighting. They differ in exchange, number of stocks and base period.

What is the role of SEBI in the securities market?

SEBI protects investors, promotes the development of the securities market and regulates it. It registers and supervises intermediaries such as stock exchanges, mutual funds and portfolio managers.

What powers does SEBI have under the SEBI Act?

SEBI has quasi-legislative powers to frame regulations, quasi-judicial powers to pass orders after hearings, and quasi-executive powers to inspect and investigate. Learn these three categories for the exam.