NSE Circular: Change in Index computation methodology of S&P CNX Nifty
With effect from June 26, 2009, the S&P CNX Nifty Index will be calculated using free float market capitalization methodology.
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. Further, the following categories would also be excluded from the free float factor where identifiable separately:
- Government holding in the capacity of strategic investor
- Shares held by promoters through ADR/GDRs.
- Strategic stakes by corporate bodies
- Investments under FDI category
- Equity held by associate/group companies (cross-holdings)
The same applies for the S&P CNX Defty and the CNX 100 indices.
Note that theBSE did this for the Sensex way back in September 2003.
“Though in the short-term fund managers would have to incur additional costs to realign their portfolios with the index, a free-float method is considered the best practice in index construction globally.”
Also, a free-float index reflects market movements better and supports passive investment styles because it is easily replicable. Further, it also avoids the undue influence of any closely-held large-capitalisation stock on the index movements.
Will this further improve the prospects of index ETFs such as those offered by Benchmark?
Will it also provide short-term trading opportunities as instituitional investors re-align their index funds to match the ‘free float’ weightages?
Will it significantly reduce the chances of manipulation and volatility in some stocks?
Will it shift the sectoral composition of the indices?
Will it result in short-term capital gains and hence tax liabilities - for the index funds?
Last, but not the least - will it make historical index data meaningless? If the NSE does not provide a re-computed historical dataset using the ‘free float’ methodology, should we backtest trading systems for the Nifty?