Mumbai, India - July 25, 2001 (PRN): On July 11, 2001, The Stock Exchange, Mumbai (BSE)launched BSE-TECk Index- the first free float adjusted equity index in the country, aimed at tracking the performance of Technology, Entertainment, Communications & other knowledge based sectors The innovative BSE TECk Index has been produced specifically as a benchmark that would reflect the dynamic and unique characteristics of the Technology, Media and Telecommunications industries in India. The 21 constituents cover around 90% of the market capitalization of the entire listed TMT universe. The base value for the new index has been set as 1000 points as on the base date of April 2, 2001.

BSE-TECk Index assumes importance due to its construction methodology that incorporates the best global standards in equity index construction. To appreciate the rationale of a free-float adjusted benchmark, it is important to understand the concept of free-float adjustment.

What is Free-Float?

Free-Float seeks to identify the amount of shares for a stock that are readily available to investors for trading in the market place. In case of a company, there are portions of its paid-up equity that are virtually locked with individuals/ entities namely promoters, promoters' other companies, directors, employee associations and government. These portions of the company's equity are closely held and are not available for trading in the market. The free-float of a company is thus the total equity minus the closely held portions.

Global Index providers like FTSE, MSCI, S&P and STOXX have fine-tuned the above definition to define free-float as the equity of a company available to international investors. This is justified since in many emerging markets, restrictions of foreign ownership often make the actual free-float less than what is apparent. For e.g. in India, maximum permissible limit for investment by Foreign Institutional Investors (FIIs) in any company is 49% of its equity capital, provided the company-board passes a resolution to that effect with the permission of the shareholders. This essentially implies that even if the free-float of a company is, say 70%, the FIIs cannot buy more than 49% of a company's equity.

Why is Free-Float adjustment required?

Ideally, an index is expected to provide a true benchmark for the market opportunities available to the investors who are tracking their portfolios with that index. An index, which includes full market capitalization of a constituent that is closely held, is overstating the buying opportunity in the stock and hence compromising on the benchmark quality of the index.

The trend towards free float weighted indices is being fuelled by the belief that weights should reflect the amount of shares actually available to investors to trade, rather than the total number issued.

The subject of investability has become increasingly important as a result of the growth of passive investing (investing in index scrips). Free-float adjustment also tends to minimize the market impact of Index fund flows.

How is Free-Float concept implemented in BSE-TECk Index?

For constructing the BSE-TECk Index, the Free-Float adjustment is implemented as follows:

The free-float of all constituent companies is determined. Free-Float consists of shares that are not held by promoters of the company or by people acting in concert (as per SEBI guidelines on the disclosure of shareholding pattern by companies on a quarterly basis and incorporated in clause 35 of the Listing Agreement of the BSE).

The market capitalization of a company is adjusted to reflect its free-float For e.g. if a company has 30% free-float (aggregate non-promoter holdings), then only 30% of the total market capitalization of the company would be considered for the purpose of calculating the BSE-TECk Index.

The trading interest in the BSE-TECk constituent scrips is significant as all TMT sector scrips account for over 68% of the daily trading volume on the exchanges. Turnover details post rolling settlement in 'A' group indicate that on an average, 8 out of the top 10 most traded stocks daily on the BSE, are constituents of the BSE-TECk index.

Free-float -- a Global Concept

The free-float concept is being followed globally. With the leading index provider MSCI announcing its proposal to adjust all its global indices in a phased manner based on free-float, the debate on free-float adjustment seems to have been transformed into a global consensus. The stance taken by major global index providers is a testimony to the worldwide acceptance of the free-float concept:

FTSE - all companies free-float adjusted from June 2001.
STOXX - fully free float adjusted since September 2000.
MSCI - will move to free float and increase coverage from November 2001 and would fully move to free float by June 2002.
Also IBEX, AEX, BEL, DAX and CAC have all initiated to move to free float adjustment.
S&P TOPIX-150, S&P ASX-200, S&P Global indices are also among the new breed of indices that have taken the free float seriously.