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B. Venkatesh

THE BSE Sensex will become a free-float index from September 1. What is a free-float index?

To understand this, let us look at a market-weighted index. Assume a one-stock index. Suppose the price of this stock was Rs 300 on January 1, 2003, the base period for the index, and the total outstanding shares then were 10,000. Further suppose the price now is Rs 360, and the total outstanding shares have increased to 15,000 shares.

What is the index today? You have to multiply the price today with the total outstanding shares now, and divide this product by a similar calculation for January 1, 2003. Thus, the product now will be 54 lakh (Rs 360 X 15,000 shares), and 30 lakh (Rs 300 X 10,000 shares) for January 1, 2003. You then have to multiply the above calculation by 100 to get the current index number of 180 [(54 lakh/30 lakh) X 100].

Now, of the 15,000 shares outstanding not all will be available for trading on a daily basis. This is because the promoters will hold sizable shares to control the company. Besides, some shares may carry lock-in period; employee stock options, for instance.

Since all these shares are not available for trading, experts suggest that we should not weight the price with the total outstanding shares to compute the index number. Instead, they suggest that we weigh it by the number of shares available for trading. This number is called the free float.

It is essentially the total outstanding shares less the promoter's holding and other shares with a lock-in period. In the above example, suppose only 9,000 shares constituted the free float in January 1, 2003, and 12,000 shares now, the index level will be 160 [(43.2 lakh/27 lakh) X 100]. World over, most market indices are calculated this way.

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