A number of major Irish companies may see investors offload their shares in favour of more liquid financial stocks following an impending reshuffle of the Irish Stock Exchange (ISE) index. Caroline Maddenreports.

Smurfit Kappa, Aer Lingus and Glanbia will be among the worst hit when the exchange switches to the "freefloat" method of calculating index weightings on June 18th, according to figures published yesterday by the exchange.

The weighting of each component on the index is currently based on the company's entire issued share capital.

Under the new rules, only shares available for purchase by investors will be taken into account. Therefore, companies with major strategic shareholders will see their relative importance on the index shrink significantly.

The latest figures from the stock exchange indicate that Smurfit Kappa's weighting will more than halve, from 3.25 per cent of the index to just 1.5 per cent. However, a spokesman for the exchange said the final weightings would not be determined until next week.

Independent News & Media will fall from 2.18 per cent to 1.57 per cent, due to Sir Anthony O'Reilly's large strategic shareholding in the company. Another O'Reilly company, Waterford Wedgwood, will see its weighting slip 46 per cent. Similarly, Aer Lingus may drop from 1.11 per cent of the index to just 0.42 per cent, a fall of 62.1 per cent, when the holdings of the State and the employee share ownership trust are taken out of the equation.

Other companies to lose out include Kerry Group, Glanbia and Kingspan.

The ISE has said that the new regime will bring the index in line with international best practice.

"It encourages investment in the underlying stocks as some investors or investment strategies are now restricted to freefloat indices," it said.

However, one possible side-effect is that companies whose weightings are reduced will lose popularity with fund managers and other investors who track the Irish index. Industry commentators say the impact on stocks is impossible to predict until the new regime comes into force.

It is difficult to estimate how many passive investors and funds are tracking the index, and the reweighting may already be priced into the market.

Among the winners will be market heavyweights CRH and AIB. Already the largest constituents of the Irish market, both will see their weighting increase under the new formula and, between them, they will account for a third of the market. Other winners include Bank of Ireland, Elan, IAWS and United Drug.