Free float market capitalization is an important constituent of the NIFTY50 – India’s flagship broad market index. In this post, we shall understand the components and importance of this concept with a few examples.
Meaning of Float Market Capitalization
Free float market capitalization is the current market value of the ‘general public’ portion of the outstanding shares. This holding does not include those held by the government, royalty or company insiders.
So what does that mean?
If in a public company, 24% of the shares are closely held by the government. This means the other 86% is publicly held. Here, the float factor of this stock will be 0.84
OK, got it!
The free float factor is a very important constituent in calculation of index. The indices using this methodology are said to be “float-adjusted” or “float-weighted”.
The Nifty 50 is one such index.
Exclusions from free float factor calculations
Exclusions for purposes of calculation of the free float factor:
- 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
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Formula to calculate Free Float Factor
The formula 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 can expect to see a high proportion of government shareholding in SBI.
This is 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. As per the calculations methodology of Nifty50, this 57% has to be excluded in the calculation of free float.
We are left with a little more than 42%.
This 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.
This company sells vegetable oil company! Right?
It might be interest to know that Wipro’s Initial Public Offering. An Initial Public Offering or IPO is the first time a company offers shares to the public at large. Wipro’s IPO was in the year 1946.
Three prominent exchanges list shares of Wipro Limited. These are – Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and the New York Stock Exchange (NYSE).
Let’s come back to the calculations.
The free-float of Wipro Limited stock for Nifty 50 calculations is ₹52,654 crores. And the total market capitalization is ₹1,75,605 crores! Thus, the float portion represents on 30% of the total market capitalization of Wipro Limited.
That’s too little a portion!
Let’s review Wipro Limited’s shareholding structure.
Hmm .. OK.
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 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 has a rather big range. It goes from as low as 10% (Coal India Limited) to as high as 100%.