What is a Free-float Index?
full-market capitalization' methodology, the total market capitalization of a company, irrespective of who is holding the shares, is taken into consideration for computation of an index. However, if instead of taking the total market capitalization, only the Free-float market capitalization of a company is considered for index calculation, it is called the Free-float methodology. Free-float market capitalization 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 capitalization of each company in a Free-float index is reduced to the extent of its Free-float available in the market.
Is Free-float SENSEX a new Index?
No, Free-float SENSEX is not a new Index. It is the same old 30 stock Index calculated on a more scientific and globally accepted methodology.
Did the new methodology change the SENSEX value on the day of implementation?
No, there was no change in the SENSEX value due to the change in the methodology. The SENSEX has continued to reflect the market in the same fashion, as in the past.
Why a Free-float based Index?
A Free-float based index is regarded as a better benchmark in comparison to a full market capitalization weighted index. It not only reflects the market trends in a more rational manner, but also aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-Ã -vis an investible index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.
What are the major advantages of a Free-float Index?
Is Free-float a globally accepted indexing methodology?
- A Free-float Index reflects the market movements better.
- It aids passive investment because a Free-float index is easily replicable
- It improves index flexibility and the resultant market coverage and sector coverage
- It avoids the undue influence of any closely-held large-capitalization stock on the index movement
- It is considered as a global best practice in index construction.
Internationally, all the major index providers have shifted to the Free-float methodology. MSCI, a leading global index provider, shifted all its indices to the Free-float methodology in 2002. The MSCI India Standard Index, which is followed by FIIs to track Indian equities, is also based on the Free-float methodology. NASDAQ-100, the underlying index to the famous ETF - QQQ is based on the Free-float methodology. FTSE, Dow Jones, S&P, STOXX and other index providers are also using the Free-float methodology.
Are there any Free-float indices in India currently ?
BSE TECk Index, launched in July 2001, was the country's first Free-float index. On 16th June 2003, BSE launched BANKEX, a benchmark for the banking sector stocks also based on the Free-float methodology. Subsequetly, SENSEX and all other BSE indices have been using this methodology ( except the BSE-PSU index).
How does BSE determine the Free-float factor for each Index constituent?
BSE has designed a detailed Free-float format to be filled and submitted by all index companies on a quarterly basis. (Format available on www.bseindia.com). BSE determines the Free-float factor for each company based on the detailed information submitted by the companies. Free-float factor is the multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float factor of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the bands given below. The banding structure reduces the potential of frequent changes in Free-float factors of index companies. A Free-float factor of say 0.6 means that only 60% of the market capitalization of the company will be considered for index calculation.
|0 - 5%||0.05||50 - 55%||0.55|
|5 - 10%||0.10||55 - 60%||0.60|
|10 - 15%||0.15||60 - 65%||0.65|
|15 - 20%||0.20||65 - 70%||0.70|
|20 - 25%||0.25||70 - 75%||0.75|
|25 - 30%||0.30||75 - 80%||0.80|
|30 - 35%||0.35||80 - 85% ||0.85|
|35 - 40%||0.40||85 - 90%||0.90|
|40 - 45%||0.45||90 - 95% ||0.95|
|45 - 50%||0.50||95 - 100% ||