After April, the Nifty may not sway significantly if there are developments specific to companies in the Anil Dhirubhai Ambani Group (ADAG).
Two of the three major stocks from this group — Reliance Communications and Reliance Power — will be out of the index on April 27.
With this, Reliance Infrastructure will be ADAG's only representation in Nifty. Incidentally, the other Indian benchmark, Sensex, contains no ADAG stocks either.
Stocks are usually replaced in the index if they have low free-float market capitalisation (non-promoter holding). Both Reliance Communication and Reliance Power figure among the bottom five stocks in terms of free-float market cap in the Nifty. Their non-promoter holdings of 32.1 per cent and 19.6 per cent, respectively, in December 2011 resulted in a free-float market cap of Rs 5,500-6,500 crore.
Lower market capitalisation could also result from a stock's underperformance resulting from adverse developments.
The policy and regulatory uncertainties surrounding the telecom sector, worries about the company's high leverage and competitive pressure on tariffs have seen the market capitalisation of Reliance Communication falling 21 per cent in the last one year.
Lower influence
Reliance Power's market capitalisation has fallen by only 10 per cent, lower than the Sensex decline of 11 per cent. But the stock's free float, at 19.6 per cent in December 2011, is low within the index constituents.
In fact, stocks from the group have seen a steadily erosion in their weights in the Nifty in the last three years.
From 4.7 per cent in 2009 their weight in Nifty dropped to 2 per cent in 2010 and stands at 1.27 per cent currently. This may drop below one per cent after two more stocks get replaced in the coming month.
Reliance Communication is getting replaced by Asian Paints and Reliance Power by Bank of Baroda.
Both these debutants have a free-float market cap that is higher than the outgoing stocks.
Move to free-float
ADAG stocks received their first setback in 2009 when Nifty moved from a total market cap to free-float market cap methodology for weighting stocks. Many ADAG stocks had to then forego their weight in favour of other stocks as they had a higher promoter holding. From 4.7 per cent in the beginning of 2009 the weight of ADAG stocks in Nifty dropped to 2.85 by end of the year.
Over the last two years ADAG stocks continued to lose weight, as Reliance Capital was also removed from the index in October 2011.
Between 2009 and 2011 Nifty has been reshuffled 11 times with stocks such as Coal India making a debut.
The stock of Reliance Industries from the Mukesh Ambani group continues to be one of the top Nifty weights. However, the weight of this stock has also reduced from 11.63 per cent in 2009 to 8.46 per cent now.
craji@thehindu.co.in