The Pakistan Stock Exchange (PSX) has solicited public comments on regulatory changes that it has proposed to improve volatility management on the bourse and increase trade volumes by enhancing the minimum share float limit.
Under the proposed amendments, listed companies with the free float of less than 25% will be required to increase it to at least one-fourth of their capital within three years and maintain it at that level thereafter.
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Free float means the number of ordinary shares that are readily available for trading through the exchange. It consists of all outstanding shares, excluding ones that are held by the sponsors, directors, government, associate companies, substantial shareholders and foreign direct investors.
Free float is also a measure of liquidity. A company’s stock becomes less liquid, or illiquid, when limited availability of tradable shares makes it difficult for the general public to buy or sell it on the exchange.
According to Topline Securities, a higher free float on the PSX will lead to increased trading, better price discovery and reduced chances of manipulation. “We believe this move is an attempt to increase share float in the Pakistan market… close to one-third of 561 listed companies on the PSX have share float of less than 25%,” it said.
While companies looking to get listed will be required to maintain at least 25% of their post-issue capital as minimum float at all times, the proposed amendments suggest the already listed firms with a float of less than 25% should submit a compliance plan along with their quarterly reports to the exchange.
Similar float restrictions exist in many markets, including India, Topline Securities says. Global investment decision support tools provider MSCI also considers free float among the factors that determine the weight of a stock in their indices, it added.
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After failing to maintain one-fourth of its capital as free float on the exchange, a company will be shifted from the main trading counter to the less liquid securities counter. However, its trading rights, privileges and obligations will not be hurt, according to the proposed amendments.
Analysts believe the absence of “strict action or penalty” for not adhering to the proposed rules may lead to non-compliance by listed companies. “We believe that most of the companies, instead of increasing the share float, may prefer to move to the less liquid securities counter,” Topline Securities said.
Index-based market halts
The PSX has also asked stakeholders for feedback on the possible introduction of index-based market halts in a phased manner by widening the existing scrip-level circuit breakers from 5% to 10% within six months.
Stock markets are prone to panic selling and over-exuberant buying, which create unusually high volatility and hurt investors. Under the current regulations, a trading halt kicks in on a stock as soon as its price increases or decreases by 5% or Re1 (whichever is higher) from the closing price of the preceding day.
The trading halt is applicable to only individual stocks, as trading at the index level continues as usual. However, the PSX is considering a proposal to implement the index-based market halt, which will bring trading in all equity and equity derivative markets to a halt in the case of excessive volatility, large price movements or steep swing in share movements of the designated index.
Under the proposal, the PSX will widen the existing circuit breaker in a phased manner, which will be followed by the introduction of index-based market halts. In the first three months of the implementation of the amended rules, the daily scrip-level circuit breaker will be enhanced from 5% to 7.5%. The index-based trading halt will be made operational on the basis of 5% index movement during the period.
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In the later three-month period, the daily scrip-level circuit breaker will operate on 10%, up from 7.5%, while the index-based trading halt will become operational on the basis of 7.5% index movement.
The last date to submit feedback on free float-related proposed amendments is April 6 while comments on the index-based market halts can be sent to the PSX by April 15.
Published in The Express Tribune, April 5th, 2016.
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