TCS is the ranked 2nd by market cap in India
But ranks 6th in Nifty weights
Reliance - largest by market cap, but ranked 2nd in Nifty!
SBI is 7th largest by market cap, but does not appear in top 10 in Nifty weightage.
Why?
The answer lies in the fact that Nifty index is based on Free Float Market cap, and not total Market Cap.
But what is Free Float Market Cap?
It is assumed that promoter holding is not free to be traded in the markets.
Promoters are unlikely to sell their stake.
So if a promoter has 70% stake, then only the remaining 30% is considered free to trade.
This 30% is the free float.
If the market cap of the company was Rs 10,000 crore, then free float market cap is 30% X 10,000 = Rs 3000 crore.
Nifty weights are decided based on the free float.
Tata Sons has 72% stake in TCS.
Thus, while overall market cap is Rs 15 lakh crore, free float market cap goes down to approximately Rs 4 lakh crore.
Thus reducing its weightage in Nifty
Infosys has nearly 15% promoter holding, ICICI Bank has 0%. Thus their free float market cap is higher than that of TCS.
Hence they rank higher in Nifty index weightage.
Why is this important - If you are looking at portfolio management, the benchmarking is done against an index. The weight to stocks in the index is an important consideration in portfolio creation!
Please repost if you think this added value :)