Valuation of BSE , NSE , What is Capitalization
Valuation of BSE Sensex / Nifty is calculated by free-float capitalization method. This is a world wide accepted method as
one of the best methods for calculating a stock market index.
On April 1, 1979 , the base value of Sensex is 100 . At irregular intervals , the Bombay Stock Exchange (BSE) authorities
review and modify its composition to make sure, it reflects current market conditions.
FREE FLOAT METHOD / FREE FLOAT SHARES
Free-float is a variation of the market cap method. Instead of using a company's outstanding shares it uses its float ,
or shares that are readily available for trading. The free-float method , therefore, does not include restricted stocks ,
such as those held by company insiders.
The Free float Adjustment factor represents the proportion of shares that is free floated as a percentage of issued shares
and then its rounded up to the nearest multiple of 5% for calculation purposes. To find the free-float capitalization of a
company, first find out its market cap (number of outstanding shares x share price) then multiply its free-float factor.
The free-float factor is determined by the percentage of floated shares to outstanding. For example , if a company has a
float of 4 Crore shares and outstanding shares of 5 Crore, the percent of float to outstanding is 80%. A company with an
80% free float falls in the 75-80% free-float factor, or 0.80, which is then multiplied by its market cap. For example: 120
Crore 12 Crore shares at Rs.10/share) x 0.80 = 96 Crore
According to the BSE / NSE, any shares that do not fall under the following criteria, can be considered as “Open Market
Shares” or Free Float Shares”:
Holdings by founders/directors/ acquirers which has control element,
Holdings by persons/ bodies with "controlling interest",
Government holding as promoter/acquirer,
Holdings through the FDI Route,
Strategic stakes by private corporate bodies/ individuals,
Equity held by associate/group companies (cross-holdings),
Equity held by employee welfare trusts,
Locked-in shares and shares which would not be sold in the open market in normal course.
Important : A company has to submit a complete report about “who has how many Company’s shares” to the Exchange.
On the basis of this, the Exchange will decide the “free-float factor” of the company. The “free-float factor” is a very
valuable number. If you multiply the "free-float factor" with the “market cap” of that company, you will get the “free-
float market cap” which is the value of the shares of the company in the open market.
In the Indian Stock Market, there are 3 categories of Shares.
1. Small Caps (those shares which have small market Capitalization less lie in between $300 million - $2billion),
2. Large Caps (those shares which have large Capitalization in between $10billion - $200billion),
3. Mid Caps (those which lie in between Small & Large)
Capitalization is the worth of a Company in terms of its shares. To calculate the market capitalization of a Company we
have to multiply the” current price of share” by “Total shares issued by the Company”.
For E.g – Suppose we buy 100 Share of ABC Company at price 10/Share than 100 x 10 = 10,000 will be our Capitalization
(means invested amount is our capitalization).
Hence, to get the Market Capitalization of a Share, we multiply “Current Price of a Share” by “Issued Share of that Company”.
VALUATION OF SENSEX / NIFTY
To find out the value of the Sensex / Nifty at a particular point, follow these steps: -
1). Find out the “free-float market cap” of all the 30 companies that make up the Sensex & “free-float market cap” of
all the 50 companies that make up the Nifty,
2). Add all the “free-float market cap’s” of all the 30 companies for sensex & “free-float market cap’s” of all the 50
companies for Nifty,
3). Make all this relative to the Sensex / Nifty base. The value you get is the Sensex / Nifty value.
Here we give an example to understand this one
Suppose, for a “free-float market cap” of Rs.100,000 Cr... the Sensex value is 4000…
Then, for a “free-float market cap” of Rs.150,000 Cr... the Sensex value will be..
So, the Sensex value will be 6000 if the “free-float market cap” comes to Rs.150,000 Cr.
Note: Every time one of the 50 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the
“market cap” calculations.
Now, there is only one question left to be answered, which 50 companies, why those 50 companies, why no other companies?
The 50 companies that make up the Nifty are selected and reviewed from time to time by an “index committee”. This “index
committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and
other participants in the financial markets.
