BSE announces change in banking index calculation

The index will follow modified market capitalization methodology, capping max weight of constituents at 22% at each rebalance

Rebalancing of the BSE's banking index, the S&P BSE Bankex, would now depend on the weightage of the index constituent spilling over 22 per cent.

BSE on Friday announced a change in the methodology of index calculation for the exchange's banking index. "Effective at the open of January 27, 2015, the index will follow modified market capitalization methodology, capping maximum weight of constituents to 22% at each rebalance," said the release from the exchange. S&P Dow Jones Indices BSE is the index provider for BSE.

This effectively means that the index weightage for each of the constituents will not go beyond 22 per cent at the time of rebalancing. "There will be no changes made to the index if the weightage of the stocks in the index are below the 22 per cent-mark at the time of the rebalancing. But weightages could go above the 22 per cent limit between two rebalances," said an exchange official requesting anonymity as he is authorised to speak to the media. Index constituents are rebalanced every six months.

As per a November 2014 S&P Dow Jones Indices paper titled Index Mathematics - Methodology, a modified market cap weighted index is defined as one where the index constituents have a user-defined weight in the index.

Currently, the Bankex follows float adjusted market capitalization methodology, one in which the only those shares which are available to investors are used for index calculation rather than all of the company's outstanding shares.

A float-adjusted index value reflects the value available in the public markets. In a modified market cap weighted index, the constituents' market values are re-defined to achieve the user-defined weighting at each rebalancing.

An exchange official said that at present there were no plans to change the index methodology of other indices but that their review was an on-going process.