NSE moves towards free float

The National Stock Exchange (NSE), has decided to calculate its benchmark indices on free float market capitalisation basis. This means that the weightages of companies in the index will be decided according to the floating stock of the company, and not by market capitalisation (full float).

The Bombay Stock Exchange (BSE) has already been calculating its indices on the basis of free float market capitalisation.

Amitabh Chakraborty, head (equities), Religare Securities, said, “This is a good move because the fair value of the index will be reflected now. All those stocks, which were heavyweights but had little floating stocks, will be adversely impacted.”

The indices, namely NSE’s benchmark index Nifty (S&P CNX Nifty), Nifty-100 and its dollar index Defty would be calculated on the basis of free floating market capitalisation, according to an announcement by NSE’s group company India Index Services and Products Limited (IISL).

The announcement also said that some of its indices like realty, PSU banks, Nifty Shariah and Shariah index of NSE’s 500 companies, will henceforth come under this new regime.
 

(As on  Mar 24)	(As on  Mar 24)		Change in
	Total mcap	FF Mcap *	weightage
THOSE WHO WILL LOSE WEIGHTAGE
NTPC	8.15	1.94	-6.21
ONGC	9.09	5.33	-3.76
Bharti Airtel	6.25	4.66	-1.60
AND THOSE WHO WILL GAIN
ITC	3.60	8.17	4.56
Infosys Technology	4.13	7.81	3.69
HDFC	2.43	5.51	3.08
*Freefloat Mcap (free float as per shareholding pattern December 2008)

The change in calculation method will be effective from June 26 this year. For Nifty Junior, this methodology will come into effect from May 4.

Free float method is favoured internationally as it takes into account only the equity holdings that are available for trading. The promoters’ holding generally doesn’t come for trading in the open market and, hence, that part of market capitalisation is not available for trading. Therefore it should not get the weightages for deciding the levels of indices.

“I think the free-float methodology would be better as most of the markets in the world follow this to compute index values. This move will align us with global markets,” said Ravi Nedungadi, president & chief financial officer of United Breweries.

IISL has also announced that the values of the indices to be computed on the new methodology will be part of the existing indices only and there will be no new indices. The free float factor (Investible Weight Factor – IWF) for each company in the index will be determined, based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges by these companies.