The National Stock Exchange’s index NIFTY will shift to free float capitalisation from market capitalization method from June 26th 2009. Under this method, the weightage of each of the 50 component stocks in the index will be proportionate to the amount of free float.
Free float is the number of shares of company in public hands- stocks that is “floating free”, that which is not with promoters.
Share holdings held by investors that would not, in the normal course come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float.
In specific, the following categories of holding are generally excluded from the definition of Free-float:
Holdings by founders/directors/ acquirers which has control element
Holdings by persons/ bodies with "Controlling Interest"
Government holding as promoter/acquirer
Holdings through the FDI Route
Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings)
Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in normal course.
The remaining shareholders would fall under the Free-float category.
Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.
Globally, most indices are moving to this system as it is perceived to be more representative of market action. Reliance Industries retained its position as the top weighted stock due to its high free float component (50%), ONGC 3.5% from 8%, NTPC to 1.9% from 6%, Infosys 7% from 3.77%, ICICI Bank 6.45% from 2.96%, Larsen & Toubro 6.41% from 3.27%, SAIL 0.77% from 2.34%. All the fund managers tracking the NIFTY made changes accordingly.
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Hello Mr. Bhavikk,
ReplyDeleteI would like to know why it was shifted from the market float to the free float.. the reason behind the shift..??
As it was running smoothly and everything was calculated as per the market float and suddenly both the exchanges started using the free float method, so what can be the strong reason behind the same..
Thanks & Regards,
Sachin Jain
HI Mr. Sachin,
ReplyDeleteFirst of all thanks for reading my blog & posting your valuable comment, as for your question on why it was shifted from Market float to free float, the reason is that in Free-float market capitalization only those shares issued by the company that are readily available for trading in the market are considered & not the total shares issued by the company(as in Full market capitalization).Free float generally excludes promoters/government/strategic holding & other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in this method is reduced to the extent of its readily available shares in the market.
A major advantages are that a free-float index reflects the market movements better, it is easily replicable , it improves index flexibility and sector coverage, it avoids the undue influence of any closely-held large-capitalization stock on the index movement ,it is considered as a best practice in index construction globally.
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BHAVIKK
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