Introduction

Free float methodology is globally regarded as an ideal methodology for calculation of equity indices. As per this methodology, free-float market capitalization of all index constituents is considered for calculation of the index. Free-float market capitalization of the index constituents is derived by applying IWFs on full market capitalization of respective companies in the index. This approach aims to limits the influence of a particular company in the index to the extent of its actual free float and reduces influence of large promoter/ strategic holding (which generally is not available for trading) on the index, thus making it truly investable.

Free float methodology in index calculation aids both active and passive investment strategies. Active managers are able to compare their portfolio return vis-à-vis the investable index and at the same time passive fund managers are able to offer low tracking error by introducing passive funds such as index funds, exchange traded funds linked to investable indices calculated based on free-float methodology.

IWF as the term suggests is a unit of floating stock expressed in terms of a number available for trading and which is not held by the entities having strategic interest in a company. Higher IWF suggest greater number of shares held by the investors as reported under public category within a shareholding pattern reported by each company.

The IWFs for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges on quarterly basis. The following categories are excluded from the free float factor where identifiable separately:

• Shareholding of promoter and promoter group
• 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)
• Employee Welfare Trusts
• Shares under lock-in category

Eg. For XYZ Ltd.

	Shares	%
Total Shares	1,00,00,000	100.00

	Shares	%
Shareholding of promoter and promoter group	19,75,000	19.75
Government holding in the capacity of strategic investor	50,000	0.50
Shares held by promoters through ADR/GDRs.	2,50,000	2.50
Equity held by associate/group companies (cross-holdings)	12,575	0.13
Employee Welfare Trusts	1,45,987	1.46
Shares under lock-in category	14,78,500	14.79

IWF = [1,00,00,000 – (19,75,000 + 50,000 +2,50,000 +12,575 +1,45,987 +14,78,500)] / 1,00,00,000. = 0.61