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Sensex switches to free float mode from today

Mumbai, Aug. 31: The 30-share Bombay Stock Exchange sensex will shift to free float methodology from Monday against the present practice of full-market capitalisation.

“We have completed technical preparation, including back testing for transition to a free float index,” BSE chief operating officer Rajnikant Patel said.

The transition is expected to be smooth and there will be no change in sensex value due to the shift. The index would continue to reflect the market in the same way as BSE is doing, he said.

Currently all equity indices in India, except the BSE-Teck Index and Bankex, are calculated using the full-market capitalisation method. Under the full-market capitalisation, the market value of a company is determined by the price of the scrip and the total number of shares. However, instead of the total market capitalisation, if the free-float market capitalisation of a company is considered for index calculation, it is called the free-float methodology.

Free-float market capitalisation is defined as that proportion of total shares issued by the company, which are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares, which will not come to the market for trading in the normal course.

Thus, the market capitalisation of each company in a free-float index is reduced to the extent of its free-float available in the market. In India, BSE launched free-float based index such as BSE teck in July 2001 and Bankex in June 2003.

The free float method will further improve the benchmarking qualities of sensex and align it with the global practices in index construction adopted by index providers like MSCI, FTSE and S&P. MSCI India Standard Index is also based on free float methodology.

Some of the firms on the sensex are Hindustan Lever (0.5 free float factor), Larsen & Toubro (0.9), Infosys Technologies (0.8), Reliance Industries (0.6), and State Bank of India (0.5).

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