Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in index.
"A free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market," said Rewat Bahadur Karki, general manager and chief executive officer (CEO) of the sole secondary market.Free-float market capitalisation is defined as the proportion of total shares issued by the company that is readily available for trading in the market.
For example, 150 million-unit of shares are listed in the Nepse but tradable shares account for only a little over 53,2000. "Since all NT shares are not available for trading, it should not weight the price with total outstanding shares to compute the index," he added."It is essentially the total outstanding shares, less the promoter's holding and other shares with a lock-in period," he said, adding that the float index will boost investors' confidence as it will reflect the real market. However, Karki clarified, "Nepse is not completely shifting to free-float methodology immediately for calculating the index.
"The float index and sensitive float index will be calculated from the closing price on August 24 as before that date no variation was observed. The NT shares started trading from August 24. Share analyst Rabindra Bhattarai pointed out, "Under a full-market capitalisation methodology, companies with large market capitalisation like NT and low free-float cannot generally be included in the index because they tend to distort the index by having an undue influence on index movement, like NT shares did in the past weeks."However, under the free-float methodology, since only the free-float market capitalisation of each company is considered for index calculation, it is possible to include such closely held companies in the index while preventing their undue influence on the index movement at the same time.
Float-index generally excludes promoters' holding, government holding, strategic holding and other locked-in shares — like employees shares — that will not come to the market for trading in the normal course.The market capitalisation was Rs 4.14 trillion before the trading of Nepal Telecom (NT) shares started. Now it has hit Rs 5.37 trillion, which is misleading the capital market. "The market capitalisation of each company in a free-float index is reduced to the extent of its readily available shares in the market," said Bhattarai. Free-float methodology makes the index more broad-based by reducing the concentration of the top few companies. "For example, the concentration of top five companies like Standard Chartered, Nabil Bank, Bank of Kathmandu, Nepal telecom and Nepal Investment Bank will reduce," he said. Free-float will reduce the weight of stocks in the index. Some stocks are likely to be hit. "Their weight in Nepse is likely to decline but price change in some company's shares will not affect the whole index," Bhattarai said adding that investors will benefit as it is more realistic than the sensitive index or the all-share index in practice now.
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