I have been getting lots of queries as to what is the free float Nifty and what does it mean when I read the following in Newspaper.

The National Stock Exchange (NSE) was switching to a free float market capitalisation methodology for calculating the value of the S&P CNX Nifty against the full market capitalisation weighted methodology previously.

Recalling the Definition of Nifty from What is Nifty

Nifty is an index or an indicator of the performance of the companies listed in national stock exchange situated in delhi. Nifty constitutes of 50 companies and the change in the Nifty index ( Up or down ) indicate the trend in the majority of the stocks.

So now the weightage of the 50 stocks which are in Nifty cannot be equal. Which means the weightage of each of the stock in Nifty is different. The current announcement just changes the way the weightage would be calculated.

Before

The weightage was proportional to the market capitalisation of the company.

Now from 26th Jun

The weightage of a stock in the Nifty will be proportional to the public shareholding (non-promoter holding) in that company and not on the market capitalisation of the company.

So what would be the effect

A company with low public shareholding, but high market capitalisation had higher weightage in Nifty like ONGC and NTPC where public shareholding is low and led to skewness in Nifty towards them.

Sensex is already on free float market capitalisation methodology for Sensex. Due to the different formulae for calculating the Nifty and Sensex, there is a huge disparity in the weightages of some of the stocks. Because of a higher proportion of public shareholding, Infosys has the second-highest weightage in the Sensex at 9.5% while it comes at number five in the Nifty. With the new formulae in effect Infosys will have the second-largest weightage, replacing ONGC, while ITC will be the third largest, replacing NTPC.

What next?