Mumbai Securities and Exchange Board of India (SEBI) has started reviewing what is free float and whether it should be minimum public shareholding or only shares that are not directly held by institutions and promoters. Two people said from Gyan, including a senior SEBI official.
“We are looking for an answer as to whether public shareholding is sufficient to give a sense of free float in a company. We had sought their opinion from both the exchanges. He has made presentations outlining the shareholding pattern of top companies based on market capitalization, how much is held by promoters and institutions, domestic and foreign. We are investigating whether there is a need to change the definition of free float for Indian companies.
Free float or floating shares refer to the number of shares available for trading. The higher the free float, the better the price discovery and the less chance of stock manipulation. Indian exchanges have a slightly different definition and include company shares available in the market for public investment.
Usually, this means public shareholding. SEBI has prescribed a minimum of 25% of the public shareholding for all listed companies.
“The purpose of calculating free float is to differentiate between strategic (controlling) shareholders, whose holdings depend on concerns such as maintaining control rather than the economic fortune of the company, and holders whose investments depend on the stock price and their valuation.” future prospects of the company,” BSE said on its website.
A new breed of companies get listed without any identifiable promoters. This has led to an opinion that free float, which usually means shares not held by promoters, may not be a true reflection of freely available shares for trading, said the second of the two people cited above.
Most of the shares of listed companies are held by foreign and domestic institutions, which do not change much from year to year.
A quick analysis of Nifty 50 companies, which constitute over 65% of the total market cap of NSE listed companies, reveals that as of September 2021, 43.7% of the market cap is with promoters, 27.4% with foreign institutions. 15.41% by domestic institutions and 11.73% by retail investors.
A year ago, similar companies had 44.25% market cap with promoters, 27.75% with foreign portfolio investors, 16.19% with domestic institutions including mutual funds and insurance companies, and 9.71% with retail investors.
“One option that is being considered is whether the institutional holding can be kept out of free float. However, it has its own set of issues. For example, a sovereign fund, even Life Insurance Corporation of India (LIC) does not rebalance its portfolio often, so its stake in some companies remains the same quarter-to-quarter with minor changes. So should this mean that their holdings should not be included in free float,” asked the second person quoted above.
LIC’s stake in Coal India has gone up from 11.10% in September 2020 to 11.01% in September 2021, in ICICI Bank from 8.87% in September 2021 to 7.59% and in Ambuja Cements to over 6%.
“Exchanges have told the regulator that they have been calculating free float this way for decades. If the rules need to be changed, they will change. However, before making any such changes, the regulator should see what global counterparts are doing.”
The SEC describes free float as the outstanding shares available for trading by public investors. Shares held by executive officers, directors and other stockholders who are deemed to be affiliates of the company, including all restricted stock and performance shares issued under equity compensation plans, are not included in free float.
SEBI’s review of free float began in the second half of 2021 when the shares of the Adani group companies almost fell. 1 trillion in market capitalization.
The Adani group of listed companies had posted a sharp fall in the share price after doubts over foreign shareholding remained stable year-on-year.
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