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Sri Lanka considers implementing a continuous minimum public float.

Colombo, Oct. 2 -- Sri Lanka's capital market watchdog- Security and Exchange Commission (SEC) is exploring the possibilities of introducing a minimum public float as a continuous listing requirement, with the aim of promoting a liquid, transparent market with a better price discovery mechanism.

Earlier in mid September, Deputy Director General of SEC, Malik Cader told media that all listed stocks would be required to ensure a minimum public float n a continuing basis while all securities will have to be deposited in the scrip-less Central Depository System. He added that currently, only about 60 percent of total stocks listed are deposited in the CDS.

Currently, companies listing themselves on the Main Board of the Colombo Stock Exchange (CSE) have to issue a minimum of 25 percent of their stock to the public in an Initial Public Offering (IPO) while those listed on the second Diri Savi Board have to issue to 10 percent.

SEC this week presented a consultation paper with the view of soliciting public comments on the proposed Public Float enhancement initiative. The 'Public float' is the portion of a company's shares in the hands of public investors or the number of shares of a company that are outstanding and available for trading by the public.

Listed companies would be given a time span of two years to implement the requirement and increase their public float. However if a company's public float falls below the minimum requirement, after this specified implementation date, such a company shall be given a period of 6 months to remedy the matter.

"A sizeable public float is a necessity for a transparent, liquid market. The greater the public float, the less potential there is for market manipulation. Furthermore, by mandating a minimum public float we are providing an opportunity for the citizens of Sri Lanka to share in the wealth produced by these companies. It is an attempt at encouraging the widest participation of ownership in enterprises,"

SEC believes that almost all over the world, exchanges impose and monitor a minimum public float, as a continuous listing requirement. Although at present, a minimum public float is prescribed at the time of listing, this is not monitored and insisted upon on a continuous basis in Sri Lanka.

However, insisting on a high level of public float may act as a disincentive to companies to remain listed. The challenge is to balance the interest of the promoters and the public.

Under the current listing rules, the term 'public' is defined as shares of a listed entity held by any person other than those directly or indirectly held by its parent, subsidiary or associate companies or any subsidiaries or associates of its parent company; and, its directors who are holding office as directors of the entity, their spouses and children under 18 years of age; and, Chief Executive Officer, his/her spouse and children under 18 years of age; and, any single shareholder who holds 10 percent or more of the shares.

"It is proposed that we continue with a similar definition of 'public' in the context of the continuous minimum public float requirement. However, it is suggested that we include substantial shareholdings by statutory institutions, which manage funds belonging to public investors or contributors and by unit trust funds as forming part of the public float (provided they do not have a representation on the Board of Directors of the listed entity)," SEC said.

Currently, at the time of listing SEC imposes a minimum public float of 25 percent across the board for companies listed on the Main Board and a 10 percent minimum public holding for the companies listed on the Diri Savi Board, irrespective of the sector or the market capitalization, which however, is not imposed as a continuous listing rule.

"It is proposed that we have a minimum float of 20% for the main board as a continuous listing rule, across the board, irrespective of market capitalization or sector, with a discretion given to the Colombo Stock Exchange (CSE) to lower this threshold if the CSE feels that a liquid market in the shares of the particular company could be maintained with a lower percentage. For the Diri Savi board, it is proposed that the initial 10% requirement remain as a continuous listing requirement as well,"

Many jurisdictions impose an automatic delisting of the shares. However, this seems too drastic a response and would ultimately be penalizing the minority shareholder. Philippines, for instance, aims to have a higher listing fee for those companies that do not have the requisite public float.

Delisting is reserved as the ultimate penalty, with adequate warning given to the company and shareholders. SEC is proposing to introduce this requirement of a minimum public float as part of the Listing Rules of the stock exchange. Hence, any violation would amount to a violation of the Listing Rules. A company which does not abide by the requirement could be transferred to the default board as an initial penalty and finally delisted.

The SEC is seeking public comments on the following:

1) How is "public" to be defined, in the context of the continuous public float requirement?

(i) Should we continue with the current definition of "public"?

(ii)Should a holding of 10% or more by a single shareholder, who is a "non affiliate" (i.e. an entity / individual not falling within (A), (B) and (C) of the current definition of "public") be considered as part of the public float?

2) What should be the minimum public float?

3) Should it be a uniform percentage for all companies or be dependent on the market capitalization of the company or based on the sector in which each company is listed?

4) How long should a company be given to comply with the new requirement?

5) Once implemented, the public float of a company needs to be continuously monitored. If a company's public float is found to have dropped beyond the minimum level, how much time should a company be given to increase the float?

6) What should be the consequences of non compliance?

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Publication:Asian Tribune (India)
Date:Oct 2, 2010
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