Before we move to free float market capitalisation, we have to understand what market-capitalisation of a stock is. It is the current market price multiplied by outstanding shares issued by the company. For instance, the market capitalisation of Reliance Industries is ₹15.80-lakh crore, (it has outstanding shares of 658.01 crore shares and the current market price is ₹2,336.50). 

Total market capitalisation includes shares issued to all, including promoters and large institutions and governments. Free-float is non-promoter holding, and free-float market capitalisation is share price multiplied by outstanding shares less promoters holding. So, excluding promoters holding of 332.27 crore shares, RIL’s free float m-cap dips to ₹8.04-lakh crore.

When several index funds and exchange-traded funds were launched in the late 1990s, shares with higher promoter holding companies were easily targeted and manipulated to enter the index, so that funds tracking the index will buy the stock, taking up its valuation. 

If a stock is widely held by the public, then manipulating the stock is difficult. So the concept of free-float market capitalisation was evolved to ensure that indices included only widely held stocks.

Also read: Moody’s changes outlook on 4 Adani Group firms to negative

FTSE was the first major index provider to introduce it in 1999, which was later adopted by other global major index providers such as MSCI and S&P 500.

The BSE Sensex shifted to the free-float m-cap method in 2003 while NSE took almost six years (June 2009).

However, high free float does not guarantee any Indian stocks an entry into the MSCI index, as it considers another important metric called Foreign Inclusion Factor.

The FIF of a security is defined as the proportion of shares outstanding that are available for purchase in the public equity markets by international investors. A stock where Government restricts foreigners from buying or limits their buying with certain threshold (such as insurance, aviation, telecom, banks) will not enter MSCI index.

Will stocks in the Adani group fall short in meeting the free-float criteria? How?

If one goes by the record provided to stock exchanges, Adani group stocks did not fail on free-float criteria. However, after the Hindenburg Research report raised doubts about some non-promoters holding held in various tax-haven geographies such as Mauritius, Cayman Islands, and Bermuda may actually be held by the Adanis anonymously, MSCI reduced the weightage of some of its stocks.

Also read: Adani effect: SC calls for SEBI’s investor-protection framework

Apart from declared outstanding shares held by promoters, MSCI also excluded some of the institutional holdings to calculate the weight. Accordingly, it reduced the weight of Adani stocks such as Adani Enterprises, Adani Total Gas, Adani Transmission and ACC in it’s indices. 

How soon will the change in MSCI indices be done?

Morgan Staley Capital International, widely known as MSCI, changes its index constituents and their weightage every quarter - February, May, August and November. The changes will take place from on the first day of subsequent month.

What will be the impact of the removal of Adani stocks from the MSCI indices?

According to reports, the four companies had a combined weightage of 0.4 per cent in the MSCI EM Index. As per market experts, this could lead to an outflow of ₹500 million (roughly ₹4,000 crore).

Also read: Adani-Hindenburg: Now for those money laundering allegations

A stock entering any index not only results in fund inflows but also gives it credibility, especially inclusion in global major indices such as MSCI, S&P and FTSE. So, this will impact the sentiment towards Adanis mainly when they go for further fund raising.

Is there a likelihood of the Indian index providers also removing Adani stocks from their indices?

When the Satyam Computer Scandal came out to light in January 2009, Nifty removed it almost immediately from the index. However, in this case, that possibility appears minimal, as currently, no such serious frauds (such as cooking up books, diverting funds) have emerged.

Given the deep slide and volatility, it is quite natural these stocks would be out of the index in the next revamp: Nifty restructures its index semi-annually (January and July end). Hence, one can see Adani stocks exiting from Nifty in July end. None of the Adani group stocks feature in Sensex.

Also read: Probe reveals overseas short-selling behind $100 billion rout in Adani shares