Meaning of Float Market Capitalization
“Free float” refers to that portion of the outstanding shares that are held by the general public as opposed to those held by the government, royalty or company insiders. So, if in a public company, 24% of the shares are closely held by the government and the other 86% is publicly held, the float factor of this stock will be 0.84
The free float factor is a very important constituent in calculation of index and ones which are weighted using the free float methodology are said to be “float-adjusted” or “float-weighted”. The Nifty 50 is one such index. For purposes of calculation of free float factor, the following categories are excluded from the factor computation –
- Shareholding of promoter and promoter group
- Government holding in the capacity of strategic investor
- Shares held by promoters through ADR/GDRs
- Strategic stakes by corporate bodies
- Investments under FDI category
- Equity held by associate/group companies (cross-holdings)
- Employee Welfare Trusts
- Shares under lock-in category
Formula of Free Float Factor
The formula for calculating the free float factor is rather simple – we take the free float market capitalization and divide it by the total market capitalization.
Let’s see some examples here for clarity.
Examples of free float from Nifty 50 stocks
Let’s see what this means with a couple of stocks on the Nifty 50
1. State Bank of India (NSE:SBIN)
Also known as the Government’s bank, SBI is India’s biggest public sector bank. We expect to see a high proportion of government shareholding which will have to excluded in the calculation of the free-float for SBI. As on 7 May 2019, the SBI has a total market capitalization of ₹267,069 crores. However, the free-float market capitalization is only 45% of its total market capitalization i.e. ₹1,19,779 crores.
Let’s examine the shareholding pattern of the State Bank of India.
Here we see that the Government of India has a 57% stake in SBI which, per the free float calculations methodology promulgated by the Nifty 50 deciding committee, has to be excluded in the calculation of free float. We are thus left with a little more than 42% which is very close to the 45% free-float factor that we estimated for SBI from the data available
2. Wipro Limited (NSE:WIPRO)
Wipro Limited is a multinational corporation that provides information technology, consulting and business process services. It might be interest to know that Wipro’s Initial Public Offering (IPO; the first time a company offers shares to the public at large) was in the year 1946. The stock is listed on the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and the New York Stock Exchange (NYSE). The free-float of Wipro Limited stock for Nifty 50 calculations is ₹52,654 crores while the total market capitalization is ₹1,75,605 crores. Thus, the free-float portion represents on 30% of the total market capitalization of Wipro Limited.
Let’s review Wipro Limited’s shareholding structure.
In this case, we see a bulk of the shares held by promoters or promoter groups. In Wipro’s case, this is as high as 76% of the shares outstanding. As a result, the free-float factor comes to only around 30% towards Nifty 50 Index calculations
Free Float Factor of all stocks in Nifty 50
We see that the float factor for determining the Nifty 50 Index ranges from as low as 10% (Coal India Limited) to as high as 100% (a number of companies are around 100% factor)