Reliance is the largest company by market cap in India But HDFC Bank has the largest weight in Nifty!
TCS is 2nd by market cap, but ranks 7th in Nifty. Why?
Airtel is 4th largest by market cap, but 8th in Nifty weights ITC is 10th largest by market cap, but jumps to 5th in Nifty weights.
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 more than 70% stake in TCS. Thus, while overall market cap is Rs 16 lakh crore, free float market cap goes down to Rs 4.5 lakh crore. Thus reducing the 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.
Great explanation, easy to understand