KARACHI, May 14: The Karachi Stock Exchange (KSE) share free float is estimated to be approximately 22 per cent based on top 27 stocks that are on the futures counter. Based on value of those shares, the free float also comes to around 20 per cent, which means that although the market capitalization of KSE is $35 billion, the free-float capitalization is just about $7 billion.
In a report on free-float of shares at the KSE, prepared by Mohammad Sohail, director stock brokering and research at Jahangir Siddiqui Capital Markets Limited, it is observed that despite the reform process that started in our capital markets in 1990s no one has ever tried to properly define and calculate the actual free-float.
Old hands among the stock broker fraternity and capital market experts have always held a firm view that free-float of the Pakistan’s bourses is very small, ranging between 10 to 15 per cent. That in turn has fuelled argument on whether the KSE-100 index should be based on market capitalization or free-float of stocks.
A stock broker said that the current KSE-100 index-—though constructed in an extremely transparent and orderly manner—-does not, however, depict the overall market conditions on any particular day. Let all the stocks rise and OGDC and PTCL drop by Rs5 on any particular trading day and the index would end up in the red and vice versa.
Sohail at JSCM explains that free-float could be defined as shares of a listed company that are available to investors for buying. He points out that all shares are not available for buying for a number of reasons, such as a large portion may be held by strategic investors who may have to hold on to these shares to control the company. It is very difficult to calculate exact free-float of shares of any company. However, one can estimate those shares based on certain information.
Firstly, shares held for corporate control should be excluded. This is a reasonable presumption where shareholder is a sponsor, an associated company or the government. Secondly, shares held in the form of physical certificates should be excluded because only shares in book entry form can be settled through the National Clearing & Settlement System. Keeping paper certificates implies a desire to hold shares for a very long time and it can take a number of weeks to convert physical certificates into book entry securities. Finally shares held by employees of a company as part of a stock option plan or are held by pre-IPO investors where there are restrictions on sale of shares should also be excluded from calculation of free float.
On March 17 this year, the KSE management issued a notice defining the formula to calculate free-float. The KSE formula is as follows: Total outstanding shares less: Government Holdings; Shares held by Associated Companies; Shares held by Directors/Sponsors; Shares in physical form. The formula the analyst contended was the same as identified by him in an earlier write-up.
According to the calculations by analyst at JSCM, free-float of Maple Leaf at 66.5 per cent of the company’s total shares outstanding at 180 million leads the rest of the market; followed by Telecard’s 61.1 per cent of its 300 million shares. The lowest free-floats are those of SEPCOL at 6.1 per cent of its outstanding shares and interestingly, that of OGDC, which has just 4.5 per cent of its 4,301 million outstanding shares in free-float.
In terms of market capitalization, PTCL with free float of Rs 39 billion of its market cap of Rs256 billion is ahead of the rest; followed by PSO with Rs25 billion of the company’s Rs66 billion market cap; Fauji Fertilizer’s market cap at Rs22.7 billion of its 50 billion market cap and OGDC’s Rs19.4 billion of its market cap of Rs431 billion.
All of that again brings to the fore, whether there should be a “free-float adjusted index”. A website of the Tokyo Stock Exchange mentions that the Tokyo Stock Price Index (TOPIX) is a market capitalization-weighted index based on all common stocks listed on Tokyo Stock Exchange’s (KSE’s) first section.
TSE has been calculating and publishing TOPIX since July 1969. The Bombay Stock Exchange (BSE) Sensex Index was converted into a free-float index from September 2003. One advantage cited in favour of a free-float index was that it would better reflect market movements. Some analysts believed that movement in the index would be lower if weighted by free-float instead of market cap. According to the same website, several major foreign indices had already implemented free float adjustment to their index series. Those included: In Europe— Dow Jones STOXX Index (introduced since September, 2000); in UK/World— FTSE World Index (introduced in June 2001); in USA/World— MSCI World Index (introduced in May 2002); in Germany— DAX (introduced in June 2002) and in France— CAC 40 (introduced in December, 2003).
