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NZX, the stock exchange operator, has gone with the popular choice and is switching its index weightings to a ‘pure free float’, meaning only stock not held in a majority stake is counted.
The changes will particularly impact the likes of Contact Energy, which is 52.4 percent owned by Australia’s Origin Energy, and the partially privatised state energy companies when they arrive on the market, since all will retain the government as a majority shareholder.
For example, Contact’s weighting in the NZX 50 Index will drop from 8.7 percent under the current rules to 4.58 percent, dropping from the third to the fifth largest weighting in the index. By contrast, Sky City’s weighting will rise slightly, from 5.6 percent at present to 6.1 percent.
NBR first revealed Contact's likley re-weighting back in January.
Fletcher Building will remain the largest listed company in the index, at a weighting of 12.5 percent, up from 11.5 percent at present.
The new methodology will apply to all equities indices from June 15, and an updated document will be released next month, the stock exchange said in a statement. NZX sought submissions on new weighting rules last year in preparation for the partial floats from state-owned energy companies. Some 86 percent of responses pushed for change, the bulk favouring a pure free float.
“NZX Indices considers such an approach is both simpler than the existing modified free float methodology and is aligned with the indexed share practice for other international indices,” the stock exchange said. “It also provides a clean, understandable and true representation of New Zealand’s investible market.”
The NZX 50 Index’s market capitalisation will fall to $35.98 billion from $39.13 billion as a result of the new methodology.
The stock exchange currently uses what it calls ‘modified free float rules’, where it subtracts strategic holdings from the total number of shares on issue to determine a company’s number of indexed shares. It then makes further adjustments based on the company’s six-month average free float market capitalisation.
The exchange will also impose tougher liquidity requirements for entry into the benchmark NZX 50 Index. That will mean at least 2.5 percent of a company’s market capitalisation in a six-month period will have to change hands to be included.
As well as the new methodology, the stock exchange will introduce the NZX20 Index on April 23 with even tougher liquidity requirements.