| Weights of PSUs in Nifty to be halved | |
| BS Research Bureau / Mumbai June 19, 2009, 0:46 IST | |
With the National Stock Exchange (NSE) adopting the free-float market capitalisation method to calculate its benchmark indices from June 26, weights of public sector undertakings (PSUs) in the Nifty will come down by at least 50 per cent.
The 10 PSU stocks in the Nifty, which currently account for 30 per cent of the benchmark’s total weight, will contribute only 17 per cent weight to it from that date.
Oil and Natural Gas Corporation (ONGC), which currently enjoys a weight of 8.37 per cent, the second highest after Reliance Industries’ 11.90 per cent, will fall by over 50 per cent to 3.82 per cent.
The weights of NTPC, Steel Authority of India (SAIL), Power Grid Corporation (PGCIL) and National Aluminum Company (Nalco) will decline by 66 per cent from their current levels.
Out of the 10 PSU stocks, ONGC, State Bank of India (SBI), NTPC and Bhel account for 22.51 per cent weight in the Nifty as against 14.84 per cent in the Sensex.
Under the free-float market capitalisation method, weights are assigned on the basis of floating stocks or open market shares of a company. On the other hand, under the full-float method, weights are decided on the total market capitalisation of the company.
The Bombay Stock Exchange (BSE) started using the free-float method from September 2003. Because of this difference in methodology, the BSE and the NSE have closed in different directions during 83 trading sessions till yesterday.
Other stocks that will be affected due to this change in methodology include Bharti Airtel, Reliance Communications (RCom), Tata Consultancy Services (TCS), DLF and Wipro.
However, Infosys Technologies, ICICI Bank, Larsen and Toubro, HDFC and HDFC Bank will stand to gain from this change as their weights will almost double from their current levels.
The free-float method is favoured internationally as it takes into account only the equity holdings that are available for trading. Since the promoters’ holdings are not traded in the open market, those stakes are, therefore, not considered for deciding a company’s weight in an index.
BOX
Free-float method
In this method, the number of shares available for open market trading decides the weight of a company in an index. This method does not take into account the shares held by promoters and institutions. As a result, companies where promoters or institutions have high levels of holdings get lower weights.
Full-float method
Unlike the free-float method, this formula takes into account the total market capitalisation of a company, which includes the shares held by promoters and institutions. As a result, companies in which promoters and institutions have high levels of holdings get higher weights.
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