The National Stock Exchange (NSE), has decided to calculate its benchmark indices on free float market capitalisation basis from 26 June 2009. This means that the weightages of companies in the index will be decided according to the floating stock of the company.
The Nifty is currently calculated using full market capitalization-weighted methodology. The free float for each firm in the index will be determined on the basis of the public shareholding.
Strategic investments by firms and the government as well as shares held by founders through American and global depository receipts will be excluded from the free float. Foreign direct investments will also be excluded.
The NSE announcement said that 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.
Free float method is favoured internationally as it takes into account only the equity holdings that are available for trading. The promoters' holding generally does not 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.
The Bombay Stock Exchange (BSE) has already been calculating its indices on the basis of free float market capitalisation.