Free Float-Based Allocation Limits

First published 23 Aug 2026 · Last verified 29 Aug 2026

Lesson 57.1 — What "Free Float" Really Means

When you look up a NEPSE-listed company's total shares outstanding, you are looking at a number that answers the wrong question for a liquidity-conscious investor. Total shares outstanding tells you how many units of ownership exist. It does not tell you how many of those units are actually available for you, or anyone else, to buy or sell on the exchange on a given day. For that, you need a different, narrower number: free float.

Free float is the portion of a company's total shares that is genuinely available for public trading — shares that sit in the demat accounts of ordinary investors, mutual funds, and institutions, free to change hands whenever their owner chooses. It excludes shares held by promoters (the founders and their affiliated entities who took the company public), government or government-linked entities that hold strategic stakes, employee or staff quota shares still under restriction, and — critically for Nepal — any shares still sitting inside a statutory lock-in period during which the depository system will not even process a transfer.

Chapter 47 walked through how promoter lock-in periods work mechanically: under Section 38 of the Securities Registration and Issue Regulation, 2073, promoter shares in a general company are locked for three years from the date of IPO allotment, with sector variations — banks and financial institutions face longer restrictions tied to the start of commercial operations, while hydropower and other infrastructure companies typically carry a three-year lock-in from listing that binds not only promoters but, in many cases, project-affected local shareholders and staff allotees as well. Chapter 14 covered the IPO mechanics that create this split in the first place: when a company goes public in Nepal, its total capital divides into a promoter portion (which stays with the founding group and does not trade through ordinary brokerage channels) and a public portion (issued through the IPO to ordinary investors). Free float is what remains of the public portion once you also strip out any shares that, for one reason or another, are not genuinely tradable yet.

Think of a company's total share count as the full seating capacity of a stadium, and free float as the number of seats actually released for public ticket sale. A stadium might seat 40,000 people, but if 25,000 of those seats are reserved for season-ticket holders, sponsors, and staff who never resell them, then the real market for a walk-up ticket is 15,000 seats — not 40,000. If you are trying to judge how easy it will be to buy or sell a ticket at a fair price on match day, the 15,000 number is the one that matters, not the stadium's total capacity. NEPSE works the same way. A company can have an impressive-sounding total share count and market capitalisation while its actual tradable float is a fraction of that headline figure.

It is worth being precise about a second distinction: free float percentage versus free float market capitalisation. Free float percentage is simply the free float share count divided by total shares outstanding, expressed as a percentage. Free float market capitalisation is that free float share count multiplied by the current market price — it converts the float from a share count into a rupee figure, which is the number you actually need when sizing a position, because your position is denominated in rupees, not in shares as a fraction of the company. Two companies can have identical free float percentages — say, both at 40% — and yet have wildly different free float market capitalisations if one company is ten times the size of the other. Both the percentage and the rupee figure matter, but for allocation-limit purposes, the rupee figure — free float market cap — is the one that does the real work, as you will see in Lesson 57.4.

Lesson 57.2 — Why Free Float Matters Independently of ADV

Chapter 56 built a position-sizing discipline around average daily volume (ADV): cap your position size as a percentage of a stock's trailing average daily traded value, so that you are never forced to unwind a position over an unreasonable number of trading days, and so that your own buying or selling never dominates a single day's tape. That rule is necessary. It is not sufficient. It solves for flow — how much trades on a typical day — but it says nothing about stock, in the balance-sheet sense of the word: the total pool of shares that could ever trade if enough sellers decided to sell at once.

Here is the gap between the two concepts, made concrete. Imagine a hydropower company with a free float of just 2 million shares. If those 2 million shares turn over briskly relative to their own size — say, 40,000 shares change hands on a typical day — that stock will look perfectly liquid by an ADV-percentage test. A position that respects a 5% of ADV limit might cap you at 2,000 shares a day, which sounds like healthy access to the market. But now ask a different question: what if you wanted to build a position of 200,000 shares — comfortably inside your ADV-based daily trading limit spread over a couple of months — and hold it? You would own 10% of the company's entire free float. Not 10% of daily volume. Ten percent of every share that anyone, anywhere, is free to trade. At that point you are no longer a price-taker in this stock. You are a structural feature of it. Its free-float-adjusted liquidity, its inclusion weight in any float-weighted index, its bid-ask dynamics on any day you decide to transact — all of it now bends around your position, whether you intend that or not.

This is the distinction the chapter title is built on: an allocation limit based on free float, standing alongside — not replacing — the ADV-based limit from Chapter 56. ADV tells you how fast you can move. Free float tells you how much room there is to move into in the first place. A swimming pool can have a very fast drain (high daily turnover relative to its own volume) while still being a small pool in absolute terms. You can drain it quickly, but you cannot pour the contents of a water tanker into it without changing its water level dramatically, no matter how fast the drain runs. A stock with a small absolute free float is a small pool. It can have brisk percentage turnover and still be a place where a moderate-sized position — perfectly reasonable in rupee terms for your portfolio — represents an outsized, potentially uncomfortable share of everything there is to own.

There is a second, related reason free float deserves its own discipline: index and passive-flow mechanics increasingly reference float, not total market cap. As Nepal's exchange has moved toward float-adjusted benchmarks — the NEPSE 30 index, introduced as "a value-weighted index based on market capitalisation that includes free-float shares in the market," requires constituent companies to have issued at least 25% of shares to the general public or to represent more than 1% of total free-float market capitalisation, and weights constituents partly by free-float market cap — a stock's free float is not merely a liquidity statistic. It is increasingly a determinant of whether index-tracking flows will touch the stock at all, and in what size. A large position in a low-float name is not just hard to exit; it can also be sitting in a stock structurally excluded from, or barely weighted in, the flows that would otherwise provide natural buying support.

Lesson 57.3 — How to Calculate Free Float Percentage and Free Float Market Cap for a NEPSE Company

Calculating free float for a NEPSE-listed company is not exotic, but it does require pulling from a few different disclosure sources, because no single NEPSE screen hands you a clean "free float" line item the way, say, a Bloomberg terminal might for a global large-cap. You are assembling the number yourself from public filings.

Start with total shares outstanding, or equivalently, paid-up capital divided by face value (NPR 100 per share is the near-universal face value for NEPSE-listed companies, so paid-up capital in rupees divided by 100 gives you the share count directly). This figure is on the company's latest annual report, its quarterly disclosures, and its listing page on the NEPSE website.

Next, identify promoter shareholding. This is disclosed in the company's prospectus at the time of IPO (covered in Chapter 14), and updated in every subsequent annual report under the shareholding pattern or capital structure section, which typically breaks the register into promoter and public categories, sometimes with further detail on the largest shareholders by name. Merolagani, ShareSansar, and similar Nepal-focused financial data platforms also aggregate this promoter/public split for most listed companies, drawing from the same regulatory filings, which makes cross-checking straightforward.

Then subtract, from the public portion, any shares that are not actually free to trade despite technically sitting in public hands. This is the step investors most often skip, and it is the step that makes the Nepal-specific free float calculation meaningfully different from a textbook definition. In Nepal this includes: (1) any public-allotment shares still inside a statutory lock-in window — most relevantly, hydropower project-affected local shareholder allotments and staff/employee quota shares, both of which are typically locked for the same period as promoter shares even though regulators classify them as "public" allotment rather than "promoter" allotment; (2) government or government-linked institutional holdings taken as strategic, non-trading stakes (relevant for a handful of companies with state involvement); and (3) any shares pledged or otherwise restricted in a way that is disclosed but not obvious from the headline promoter/public split. SEBON's periodic disclosures and the company's own annual report notes are where this detail surfaces; the CDS and Clearing Limited (CDSC), Nepal's central depository, is the system that actually enforces these restrictions by flagging locked ISINs at the account level and blocking any transfer attempt until the lock-in date passes.

Once you have a clean free float share count, the two figures you need follow directly:

Free float percentage = Free float shares ÷ Total shares outstanding × 100

Free float market capitalisation = Free float shares × Current market price

Table 1 works through this calculation across five NEPSE-listed companies chosen to represent different structural situations: a large commercial bank near the regulatory promoter floor, a hydropower company still inside its post-listing lock-in, a hydropower company that has passed lock-in, a manufacturing company with a long-standing public float, and a hotel/tourism company with a moderate promoter stake. Figures are illustrative, built to typical Nepal-market proportions rather than quoted from any single company's live filing, and are for teaching the calculation, not for use as current market data.

A few things this table is built to show. First, notice that Karnali Jal Vidyut and Sunkoshi Hydro Power have an identical promoter holding of 41% — but Karnali's free float is 35% while Sunkoshi's is 59%, purely because Karnali is still inside its lock-in window and a large slice of its nominally "public" shares (the local and staff quota allotments) are not yet transferable. Same promoter stake, very different tradable pool, purely as a function of where each company sits on its lock-in calendar. Second, notice that Annapurna Resort has the smallest free float market cap by a wide margin — NPR 156 crore — despite not having the lowest free float percentage. Its total company size is simply small, so even a "normal-looking" 38% float translates into a thin absolute pool. This is exactly the percentage-versus-rupee-figure distinction from Lesson 57.1 doing its work: you cannot judge float adequacy from the percentage alone.

Lesson 57.4 — The Free Float Allocation Limit Rule

With free float market cap in hand, the sizing rule itself is simple to state, even though the number takes some work to assemble: cap your individual position in any single stock at a fixed percentage of that company's free float market capitalisation, not merely at a percentage of its ADV.

Why a percentage of free float market cap, and not some other reference point? Because free float market cap answers the specific question that matters for a long-horizon investor building meaningful positions: if I own this much, what fraction of everyone who could ever sell to me — or everyone I might one day need to sell to — do I represent? A position that is a small fraction of free float leaves plenty of other holders on both sides of the market; you are one participant among many. A position that is a large fraction of free float means the stock's trading dynamics increasingly depend on your presence, your absence, and your intentions. You stop being a price-taker and start becoming a price-setter, often without meaning to and without the market depth to support that role gracefully.

A reasonable starting discipline — adjust to your own risk tolerance and the depth of your broader portfolio — is to cap any single position at somewhere between 1% and 3% of a company's free float market capitalisation, with the tighter end of that range reserved for thinly floated names (hydropower companies still inside lock-in, small hotel and manufacturing counters) and the looser end reserved only for the handful of NEPSE names with genuinely deep, long-established public floats, such as the largest commercial banks. This is deliberately more conservative than it might sound at first: 2% of free float is a much smaller number, in absolute rupee terms, than 2% of total market cap, precisely because free float market cap is itself already a fraction of total market cap. That gap is the whole point of the rule — it is designed to bite harder on exactly the low-float names where ADV-based sizing alone would let you in too easily.

The discipline only does its job when you apply it as a joint constraint alongside the ADV rule, taking whichever ceiling is more binding — never averaging the two, and never treating a pass on one test as license to ignore the other. Table 2 works through this with the same five illustrative companies from Table 1, assuming an investor with a portfolio large enough to be contemplating a NPR 25 lakh (2.5 million) position size, applying a 2% free float ceiling and, borrowing the Chapter 56 convention, a 7% of trailing 20-day ADV ceiling.

Read this table carefully, because the last two columns are where the discipline actually earns its keep. In four of the five names, the ADV rule from Chapter 56 turns out to be the tighter constraint — the stock's daily turnover is thin enough, relative to its own float, that you would run out of ADV room before you ever approached the free float ceiling. But look at Annapurna Resort. Its daily traded value is so low in absolute terms (NPR 8 lakh a day) that a naive investor might assume the free float rule would be the redundant, looser check here too. It is not. Because Annapurna's free float market cap is itself so small (NPR 156 crore), the 2% free float ceiling of NPR 3,12,000 is actually looser than the 7% ADV ceiling of NPR 56,000 — meaning ADV is still the binding constraint by these numbers, but only barely, and a slightly less conservative ADV percentage (say 15% instead of 7%) would flip the free float rule into the binding one immediately. This is precisely the scenario the chapter opened with: a stock whose absolute liquidity pool is so shallow that even a modest loosening of your daily-turnover assumption runs you straight into the float ceiling. The two rules are not redundant checks that usually agree; they are independent tests that can each become the deciding factor depending on a company's specific liquidity architecture, and you need to compute both, every time, to know which one is protecting you on any given name.

Lesson 57.5 — Why Hydropower Counters Have a Structural Float Problem

Chapter 42 covered the project-finance architecture behind Nepal's hydropower boom: how these projects are typically financed through a layered capital structure of promoter equity, project-affected local shareholder allotments (a regulatory requirement designed to give communities living near a project a direct ownership stake), staff and employee quota shares, and public IPO shares, all sitting atop substantial project debt. That layered structure, while sound policy for spreading the benefits of hydropower development to local communities, has a direct and often underappreciated consequence for free float: a meaningfully larger share of a hydropower company's capital sits outside the freely tradable pool, for a meaningfully longer effective period, than is typical for a bank, a manufacturer, or a hotel company.

Consider the arithmetic. A commercial bank's structure, as covered in Lesson 57.3, is comparatively simple: a promoter tranche (regulated at a 51:49 minimum split against public shareholding, itself a change from the previous 70:30 requirement) and a public tranche that, once the standard lock-in expires, is essentially all tradable. A hydropower IPO typically layers in the local/project-affected quota and staff quota on top of the promoter tranche — and, as the lock-in data compiled from NEPSE hydropower listings shows, these local and staff allotments are frequently subject to the same multi-year lock-in as the promoter shares themselves, even though they are classified as part of the "public" allotment in headline reporting. The result: a hydropower company's headline promoter percentage may look no worse than a typical industrial company's, but its effective free float — the shares genuinely free to change hands the day after listing — can be substantially smaller, because a meaningful slice of the "public" allocation is locked right alongside the promoter shares.

This has two practical implications for a Nepal-focused investor applying the free float allocation limit. First, the free float calculation for a hydropower counter needs closer scrutiny than for other sectors — do not assume "public %" from a summary data source equals "free float %"; check the annual report or prospectus notes for whether local and staff quota shares are broken out separately and whether they remain inside a lock-in window, since aggregator platforms do not always make this distinction clear at a glance. Second, because hydropower is one of the most actively promoted retail investment sectors in Nepal — a large share of new NEPSE accounts and new capital inflow over the past decade has gone toward hydropower IPOs and secondary trading — many of the sector's most retail-popular counters are, by the mechanics above, also its most float-constrained. Popularity and float depth are not the same thing, and in Nepal's hydropower segment they are frequently working against each other: heavy retail attention chasing a structurally thin tradable pool is close to a textbook description of a liquidity trap waiting for a crowded exit, a theme this chapter's companion, Chapter 55's coverage of exit risk in NEPSE, examined from the demand side. Free float allocation limits are the supply-side complement: they cap how much of that thin pool you are willing to own before you become part of the exit-risk problem yourself.

Lesson 57.6 — Float Expansion Over Time: Tracking Lock-In Expiry as a Liquidity Event

Free float is not a static number. For most NEPSE companies still within a few years of their IPO, free float rises over time — sometimes gradually, through incremental secondary issuance or promoter divestment, but very often in a single discrete jump, on the specific calendar date a statutory lock-in period expires and a large block of previously frozen shares becomes transferable overnight. Chapter 47 covered the mechanics of these lock-in periods; this lesson covers why the expiry date itself deserves to be tracked as a liquidity risk event, not just a compliance footnote.

Two things happen simultaneously on a lock-in expiry date, and they pull in opposite directions for anyone holding the stock. On one hand, the company's genuine free float expands, often substantially — a hydropower company that has been trading a 35% float for three years can see that figure jump to 59% or higher the moment its local/staff quota and promoter restrictions lift, exactly as illustrated by the Karnali-versus-Sunkoshi comparison in Table 1. A larger float is, in the medium term, good news for anyone applying the allocation-limit discipline from Lesson 57.4: it mechanically raises the rupee ceiling available to you, and it generally improves the stock's ability to absorb larger trades without violent price impact. On the other hand, the newly unlocked shares do not arrive in the market with an obligation to be held. Promoters, local shareholders, and staff allotees who have waited three years to have tradable shares often include holders eager to realise gains, meet liquidity needs, or simply rebalance out of a concentrated single-stock position — and because the unlock happens on a single date for the entire restricted block, the potential supply overhang arrives all at once rather than gradually. A stock that has traded thinly and firmly for three years can see real, sustained selling pressure precisely in the weeks following its lock-in expiry, even with no change whatsoever in the underlying business.

The practical response is a lock-in expiry calendar, maintained alongside the float-tracking sheet recommended in Lesson 57.3. For every hydropower, banking, or other holding still within its statutory lock-in window, note the IPO or listing date, the applicable lock-in duration for that sector (three years general/hydropower from listing, five years minimum for banks and financial institutions from commencement of operations, per the variations covered in Chapter 47), and the resulting expected expiry date — cross-checked against the company's own 30-day advance disclosure once it is issued. Treat an approaching expiry date the way you would treat any other known, dated, and reasonably predictable liquidity event: not as a reason to panic-sell in advance, but as a reason to reassess your position size against a free float figure that is about to change, and to be alert to the possibility of elevated volatility and heavier-than-usual volume in the weeks immediately following the unlock, distinct from any change in company fundamentals over that same period.

There is a corollary here worth stating plainly: a stock's improving float profile is a reasonable factor in favour of it, over time, becoming a candidate for a larger position — but only after the expiry has actually occurred and the market has had time to absorb whatever supply materialises, not merely because the expiry is scheduled or imminent. Sizing up in anticipation of a float expansion that has not yet happened, on the theory that "the float ceiling will be higher soon," inverts the entire logic of this chapter's discipline. The allocation limit exists to be measured against the float you actually have today, not the float you expect to have next quarter.