Dec 222013

Having conducted three rounds of public consultations, capital market watchdog the Securities and Exchange Commission (SEC) last Friday issued a directive on minimum public float as a continuous listing requirement effective from January 01,2014.

As Mirror Business last week reported, the new rules will require a Main Board listed company to have a minimum of 20 percent public free float, scattered among at least 750 shareholders. Else, the Main Board listed companies should have shares having a market capitalization of Rs.5 billion in the hands of at least 500 shareholders, while maintaining a minimum public holding of 10 percent.

In the case of a Diri Savi Board listed company, the public float requirement stands at 10 percent and it should be scattered among at least 200 public shareholders.

According to SEC Deputy Director General and Officer in Charge Dhammika Perera, there will be about 70 companies out of the 288 listed companies who will have to adjust their free float to comply with the new rules.

Although the SEC may consider extensions or exemptions to the rule on a case-by-case basis if such applications were received, the regulator said non-compliance would result in sanctions by way of publication of a notice of malfeasance, suspension of trading or mandatory delisting.

Further the listed companies having public holdings below the specified levels are also required to submit a report on the current distribution of shares as at the effective date, on or before March 31, 2014 both to the Colombo Stock Exchange and SEC.

According to the SEC, the new rules were introduced with the objective of promoting a liquid and transparent market with a better price discovery mechanism.

The SEC however has provided transitional provisions for all companies already listed in the Colombo bourse which do not meet these minimum thresholds as of the effective date.

As such, a Main Board listed company should increase its public free float to 15 percent by December 31, 2015 and this must be in the hands of at least 500 public shareholders where public shareholding in not limited to shares held by the government, state pension funds and retail shareholders who are not excluded by the SEC under its directives issued on August 23 and October 11 in 2013.

In case of a Diri Savi Board listed company, a minimum of 7.5 percent of stake must be in the hands of at least 100 shareholders by the end 2015.

While SEC might grant extensions (up to a maximum of two, 12 months each) for an entity to maintain a low percentage for a further specified period, granting of exemptions will be considered provided such a lower percentage is sufficient for a liquid market, including whether there are reasonable grounds to expect the public holding to reach the required threshold at the end of the second extension period if granted.

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Dec 162013
CSE to implement minimum free float from January
The capital market watchdog Securities and Exchange Commission (SEC) is likely to issue a directive in early part of next year, setting out rules on the ‘minimum mandatory continuous free floating limits’ for Colombo Stock Exchange (CSE) listed companies, according to a top official.

SEC’s Officer in Charge (OIC) and Director Investigations Dhammika Perera said the directive would come as a blanket rule which must be applied by all listed entities— big or small, domestic or multinational.

The new rules will require a Main board listed company to maintain a minimum of 20 percent stake in the hands of the public while the requirement for a Diri Savi board listed company is 10 percent.

“Having said that, we do not expect all these companies to have their 20 percent or 10 percent stake in the hands of the public on the following day of the directive. We will give them some time to increase their existing public stakes to the stipulated levels over time. But eventually all will have to up their public free float to these levels,” he insisted.

The draft rules in the public consultation paper issued by SEC in September 2013 said they would allow two years from the effective date of the rules for all the listed entities to increase their public shareholding to the stipulated levels, but the increase must happen at least by 5 percent per annum.

Furthermore, SEC will have the discretion to reject or grant extensions for companies that fail to maintain the minimum public float. In the event of no further extension time is granted, those companies will be penalized by transferring them to the Default board.

However, the yet to be issued directive will have some leniency on Main board listed companies while some exemptions might be granted for them if the circumstances warrant.

“We might consider some of the requests on a case-by-case basis and they might be allowed some kind of leniency on the rule if the circumstances warrant. But no exemptions will be granted for Diri Savi board listed companies,” he added.

Mirror Business learns that exemption might be granted for entities whose market capitalization of the public float is maintained at minimum Rs.5 billion. But this will also depend on the number of shares and the percentage stake held by the public is in agreeable terms to the SEC.

The absence of a sizable free float is often cited as a deterrent to a more transparent and a liquid stock market. Hence the Colombo bourse is becoming less attractive for foreigners and foreign funds who seek easy exit whenever they want.

However the lack of liquidity in the Colombo bourse was also proved helpful to avert sudden massive capital outflows during the heightened Fed tapering fears this year. On the contrary, emerging markets like Indonesia, India and Brazil which have liquid capital markets saw massive outflows during the same period.

Setting up of minimum continuous free float limits has been on SEC’s agenda for the last three years and it never took off having twice called for the public comments back in September 2010 and July 2011.

“This time we received many representations for our consultation paper and we took all the measures to incorporate their concerns as much as possible in drafting the directive,” Perera said. (DK)

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