Float dynamics: Higher float to keep ETF buying in Airtel, CIL buoyed up

Bharti Airtel, Coal India, and AU Small Finance Bank (SFB) are expected to see inflows of upwards of Rs 1,000 crore as their weightings are set to rise in popular indices due to an increase in free-float shareholding.

On the other hand, Maruti Suzuki India, Mahindra & Mahindra (with low probability), and Dabur India could see some outflows as their free float has decreased, according to Brian Freitas, an analyst with Periscope Analytics.

Free float is the quantum of shares that are freely available for trading. Typically, shares held by public investors and those not under any lock-in are considered free float, while those held by promoters or long-term strategic investors are excluded as they are not available for buying and selling in the normal course.

Based on changes to the float during the three-month period ended March 2024, Freitas has calculated the possible weighting changes in these stocks and their likely impact on passive flows.

For instance, Singapore Telecommunications (Singtel) pruned its stake in telecommunications carrier Bharti Airtel by selling $710 million worth of shares in May. As Singtel was classified as a ‘promoter’ entity, Airtel’s weighting will rise both in domestic indices such as the National Stock Exchange Nifty and the S&P BSE Sensex, as well as global indices compiled by MSCI (Morgan Stanley Capital International) and FTSE (Financial Times Stock Exchange).

In some cases, Freitas expects the weighting to increase on account of selling by state-owned insurer Life Insurance Corporation of India or certain pre-initial public offering investors.

In the case of AU SFB, the higher float is due to the increase in foreign investment legroom.

“The changes in free float could be reflected in domestic and global indices over the next few weeks and months, resulting in action from passive trackers,” he said while identifying 14 stocks with passive inflows from global trackers and seven with passive outflows in May.

Typically, a stock tends to outperform whenever its weighting is set to increase in an index. Similarly, a scrip could underperform if its weighting is reduced. However, many investors don’t wait until the day the changes take effect. As a result, the potential upward or downward action in a stock plays out well in advance.

“There will be some pre-positioning already, and that should be taken into account when evaluating relative trades,” says Freitas.

Changes to the float can also occur if a company issues new shares, which leads to a dilution of the promoter stake.