Mumbai, July 18: Come September, the 30-share BSE sensex — the Indian stock market’s premier index mirroring its various moods — will become more accurate by basing itself on the free float of the share.
“From September 1, 2003, BSE sensex, the country’s equity benchmark, will be calculated based on the free-float methodology,” the Bombay Stock Exchange said. Currently, the sensex is calculated based on the full-market capitalisation method.
In the new setup, non-promoter holdings of index heavyweights such as State Bank, Reliance and Hindustan Lever will play a significant role in deriving the value of the benchmark index.
Globally, the free-float method of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same.
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.