KARACHI: Pakistan Stock Exchange (PSX) on Monday proposed to ask listed firms to maintain their float at 25 per cent within the next three years.

The regulation would apply to companies with share capital of Rs5 million or more.

The measure marks one of the several which the market regulators are in the process of initiating to increase the liquidity at the market.

According to proposed free-float rule, new companies who wish to enter the stock market would also be required to maintain free-float at 25pc of post issue capital.

Free-float, as per upcoming regulations, means all outstanding shares excluding government shareholding, directors/sponsors shares, shares in physical form, shares of associate companies, employees share scheme, substantial shareholders, treasury stocks and any other category barred from selling shares.

In case of non compliance of the free-float rule, the errant companies would be shifted from main counter to ‘less liquid securities counter’. However, trading rights privileges and obligations of such firms would not be affected.

“According to available information, close to one third of 561 listed companies at PSX has share float of less than 25pc,” commented analysts at Topline Securities.

The free-float restriction is not unique to PSX. Similar restrictions apply in other markets such as India.

Analysts believe that the higher float would increase trading, help in better price discovery and will reduce chances of manipulation.

MSCI also considers higher share float to determine weight of shares in their indices.

It has, however, to be seen that in the absence of a penalty for non-compliance, companies with lower than 25pc free-float, particularly the sponsors (traditional ‘seths’) would opt to comply or let their companies be shifted to the less liquid securities counter.

Published in Dawn, April 5th, 2016