Chapter 5 of 15
Understanding Market Cap and Indices
What market cap means and how Nifty 50 / Sensex work.
Suresh, a mutual fund distributor in Jaipur, often explained to clients that their large-cap fund invests in "top 100 companies by market cap" and their mid-cap fund in "companies ranked 101–250." But when a client asked him what exactly "market cap" means and why the Nifty 50 goes up when Reliance rises, Suresh realised he needed to explain the machinery behind these numbers more clearly.
What Is Market Capitalisation?
As of a recent quarter, TCS (Tata Consultancy Services) had approximately 363 crore shares outstanding, and its share price was around ₹3,500. TCS Market Cap = ₹3,500 × 3,63,00,00,000 shares = ₹12,70,50,00,00,00,000 ≈ ₹12.70 lakh crore
This makes TCS one of India's most valuable companies. At ₹12.70 lakh crore, TCS's market cap is larger than the GDP of many small countries. You can verify this live on Screener.in by searching "TCS" and checking the Market Cap field.
Free Float Market Cap
For example, if TCS has 363 crore total shares but promoter Tata Sons holds 72% (≈261 crore shares), the free float is only 28% (≈102 crore shares). Indices like Nifty 50 use free-float market cap weighting because only freely tradable shares reflect genuine market activity.
Large, Mid, and Small Cap — SEBI's Definition
SEBI formally defines market cap categories based on ranking by full market capitalisation:
| Category | SEBI Definition | Examples | Risk Profile |
|---|---|---|---|
| Large Cap | Top 100 companies by market cap | Reliance, TCS, HDFC Bank, Infosys, ITC | Lower risk, stable returns, dividend history |
| Mid Cap | Companies ranked 101–250 by market cap | Persistent Systems, Coforge, Trent, Tube Investments | Moderate risk, higher growth potential |
| Small Cap | Companies ranked 251 and beyond | Scores of emerging companies across sectors | High risk, high potential, low liquidity |
AMFI (Association of Mutual Funds in India) publishes the official large/mid/small cap stock lists every January and July. Mutual funds must comply with these lists in their stock selection. Companies can move between categories — a rapidly growing mid-cap may become large-cap after the next update.
How Nifty 50 and Sensex Are Calculated
Both Nifty 50 and Sensex use free-float market cap weighted methodology. The steps:
- Calculate free-float market cap of each constituent stock
- Sum up all constituent free-float market caps to get the total index market cap
- Divide by a base market cap and multiply by the base index value (Nifty base: 1,000 on Nov 3, 1995)
Assume the total free-float market cap of all 50 Nifty companies equals ₹2,00,00,000 crore. Reliance has a free-float market cap of ₹12,00,000 crore — its weightage in Nifty 50: Reliance weight = ₹12,00,000 / ₹2,00,00,000 = 6%
If Reliance rises 3% in a day, its contribution to Nifty's move = 6% × 3% = 0.18%. With Nifty at 22,000, that's a 39.6 point rise just from Reliance. Meanwhile, a small-cap stock with 0.1% weight rising 5% contributes only 2.2 points.
Index Reconstitution
The Nifty 50 is not a static list. NSE's Index Maintenance Sub-Committee reviews the Nifty 50 constituents twice a year (typically March and September). Stocks that no longer meet the criteria (liquidity, market cap, trading frequency) are replaced by stronger candidates.
Recent additions like Adani Enterprises or Jio Financial Services replaced companies that dropped in market cap or liquidity. When a stock is added to the Nifty 50, index funds must mandatorily buy it — this mechanical buying often causes the added stock's price to jump.
Sector Indices
Beyond the broad Nifty 50, NSE and BSE maintain dozens of sectoral indices:
- Nifty Bank: 12 banking stocks (HDFC Bank, SBI, ICICI Bank, Kotak Mahindra Bank…)
- Nifty IT: 10 IT stocks (TCS, Infosys, HCL Tech, Wipro, Tech Mahindra…)
- Nifty Pharma: 20 pharma companies
- Nifty FMCG: Consumer goods companies (HUL, ITC, Dabur, Britannia…)
- Nifty Auto: Auto manufacturers and ancillaries
Sectoral indices help investors track how a specific industry is performing versus the broad market.
Which company currently has the highest market capitalisation among Nifty 50 constituents?
Key Takeaways
- Market Cap = Share Price × Total Shares Outstanding; Free Float Market Cap excludes promoter-held shares and is used for index weighting.
- SEBI defines large-cap as top 100 companies, mid-cap as rank 101–250, and small-cap as rank 251+ by full market cap — this list is updated every January and July.
- Nifty 50 is market-cap weighted — larger companies like Reliance and TCS have more influence on the index than smaller ones.
- Nifty 50 is reconstituted twice a year; stocks added to the index often see price rises due to mandatory buying by index funds.