On the higher public float

At long last, all listed companies may soon be required to open more of its capital base to the investing public.

For starters, the Securities and Exchange Commission (SEC) mandated in a recent memorandum circular that starting July 1, “all” companies filing a registration statement pursuant to sections 8 and 12 of the Securities Regulation Code (SRC) and with an intent to list shares for trading in the bourse “should” offer a public float of at least 20 percent of their issued and outstanding shares.

This is part of the SEC’s long-standing effort to increase the public float requirement to enhance public awareness and interest, redounding to the further development and enrichment of the capital market.

The public float of a company refers to that portion of its issued and outstanding shares that are held in small amounts by a wide number and variety of investors, such as the general investing public. They are freely tradable as any shares of the company.

Also, a company’s public float is unlike the block of shares held and used by investors for the purpose of gaining control or influence. The shares of a company’s public float are, thus, considered non-strategic in nature.

Strategic shares, on the other hand, are those blocks of shares equivalent to 10 percent or more of the total issued and outstanding shares of a listed company, owned and held by a single investor or related investing parties. These investing parties could either be an individual or a corporate.

The minimum public ownership of a company is measured by its minimum public float. In our present case, listed firms are only required to maintain a 10-percent public ownership level.

Non-compliance by publicly listed companies, according to the SEC, may result in administrative sanctions provided under section 54 of the Securities Regulation Code (SRC).

Likewise, they may also be subject to a higher tax rate. Under the provisions of Revenue Regulations No. 16-2012 of the Bureau of Internal Revenue (BIR), all publicly listed companies are required to maintain a minimum public ownership as prescribed by the SEC to enjoy preferential tax treatment.

Stock transaction tax for compliant listed companies is limited only to one-half of 1 percent of gross selling price. For those who fail to meet the requirement, they are subject to a final tax of 5 or 10 percent and a documentary stamp tax.

Bottom line spin

I believe the effort to formalize the imposition of a higher public float was revived in 2012 by the SEC’s current chairperson, Teresita J. Herbosa. The pressing objective at the time was to raise the minimum public float to at least 12 percent.

As it turned out, many listed companies had difficulty in complying even with the 10 percent rule due to internal constraints. In some cases, these difficulties were borne out of apathy or pure negligence.

Intervening negative market factors abroad also had profound impact on the local market’s volatility, casting doubt on the wisdom of effecting higher public ownership then.

The efforts, however, led to the present strict observance and monitoring of the 10-percent public ownership rule.

The new ruling could be implemented in the next two years or so. Positive feedback showed, however, that the timeline could be shortened. SEC even prefers a 2017 schedule.

As argued, a higher level of public float would lend to better market depth. This, in turn, provides better liquidity—an essential factor in attracting good quality and long-term investors. Increased liquidity, likewise, enhances market efficiency since it reduces unnecessary price volatility.

A wider stockholder base may also serve to hamper what is described as “collusive market actions or price manipulations.”

The most compelling argument, as strongly put forward by the SEC chair: a higher minimum public ownership level would increase the free float market capitalization of our market and enhance the Philippines’ relative weight in globally tracked indices.

This will help attract more capital especially with the ongoing integration of the Association of Southeast Asian Nations (Asean). This should only lead to good governance.