Decoded: What exactly is a public float and why is it so important?

Shares held by non-promoters are called public float or public shareholding

Any listed company has to ensure that at least 25 per cent of its shareholding is with the public at large. Shares held by non-promoters—be it retail investors, mutual funds, foreign portfolio investors (FPIs), and insurance companies—are called public float or public shareholding.Shares held by entities or individuals that incorporate the company and/or exercise control over the company are categorised as promoter shareholding. 

What is a free-float?

Typically, shares held by the public are termed free-float. However, those shares that are under lock-in or have some lien created over them or that are not easily traded in the market are excluded to arrive at actual free-float.

Why is it important?

The higher the free float, the greater the possibility of fair price discovery. As more shares get traded by a diversified set of shareholders the chances of arriving at a better valuation of the underlying company or asset improve. On the contrary, shares of companies with low-free float can easily be manipulated. Also, index compilers such as MSCI, FTSE, and Nifty consider only the actual free float of a company so that buying and selling the stock is easy for exchange traded funds (ETFs) tracking the index. To illustrate: Tata Consultancy Services (TCS) is the country’s second-most valuable company after Reliance Industries. However, it is not among the top-five Nifty weights as the Tata group firm has a low public float of 27.7 per cent. On the other hand, rival Infosys’ m-cap is half that of TCS, but it enjoys a much higher weightage in the Nifty index as it has more than 80 per cent public float.

Actual free float

Most listed companies have adhered to the 25 per cent minimum public shareholding (MPS) norms. However, their actual free float is much less. This could be because of low legroom for FPI investments due to sectoral caps. For instance, HDFC Bank is not part of the MSCI Global index as shares available for foreign investors in the bank are below the threshold set by the global index provider. Another reason for low actual free float could be the cornering of shares by friendly institutional investors. In some companies, there are concerns over whether the FPI shareholders are indeed public investors or entities linked to the promoters. A few years ago, markets regulator Sebi initiated a study along with stock exchanges to analyze actual free float top listed companies. The result of this study is not public.

How to achieve free float?

The promoter holding in newly-listed companies can be more than 75 per cent at the time of listing. Similarly, promoter holding can overshoot 75 per cent in case promoters launch an open offer or initiate a buyback. Also, companies getting re-listed after bankruptcy proceedings can also have high promoter shareholding. In such cases, Sebi grants between three and five years to achieve a 25 per cent public float. However, this has to be done through specified routes to ensure that public shareholders are onboarded. Some of the avenues allowed to achieve MPS norms are share sale through the offer for sale (OFS) route, follow-on public offering (FPO), qualified institutions placement (QIPs), rights issue, and bonus issue. Recently, Sebi introduced two new methods-- including the transfer of shares held by promoters to an ETF and the allotment of shares under an employee stock option programme (ESOP).