"Free Float" or "Public Float" determines a company's public ownership. The Securities and Exchange Commission Memorandum Circular 13 Series of 2017 defines Public Float as "the portion of the issued and outstanding shares that are freely available and tradable in the market and are non-strategic in nature, or those not meant for gaining substantial influence on how the company is being managed. Free Float data are based on the Public Ownership Reports that are submitted to the Philippine Stock Exchange.

Section 2.2.3 of the PSE Policy on Index Management listed some examples of strategic shares, such as restricted shares or shares under lock-up; treasury shares; shares held by employees under stock ownership plans; shares held by founders; directors and officers, and their families; shares held by pension funds and government-run social security funds; shares held by affiliates; shares held by principal shareholders or those who individually or collectively control 10 percent or more of the outstanding shares; and shares held by controlling shareholders or those who are individually or collectively under common control or bound by a voting trust agreement that exerts control over the company.

The PSE announced way back in August last year that come December 2022, membership in the PSE indices would necessitate an increased free float requirement of 20 percent (from 15 percent).

These PSE indices include PSEi, Financials Index, Industrial Index, Holding Firms Index, Property Index, Service Index and Mining Oil Index.

Section 1.2.1 of the Policy describes the PSEi as the "main index of the Exchange, composed of a basket of 30 companies, whose selection is based on a specific set of criteria, and it measures the relative changes in the free-float adjusted market capitalization of the 30 largest and most active common stocks listed at the PSE, thereby providing a snapshot of the market's overall condition." The other 6 indices represent each major sector under the industry classification of the Exchange. More than a year was given to index companies as it was noted that some of these companies' free float was just dangling beyond the 15 percent mark.

As approved by the SEC in 2017, 20 percent is likewise the minimum percentage required for a company applying for an initial public offering, and such must be reflected in the company's registration statement pursuant to Sections 8 and 12 of the Securities Regulation Code. The PSE clarified, however, that maintaining the free float at this rate is not a requirement for continued listing.

The increase in the free float rate should be viewed positively. According to the SEC, there are various advantages of having higher public floats, among which are: increased liquidity, resulting in improved market efficiency, reduced volatility and price discovery; large and dispersed shareholding which lowers the opportunities for collusive market action or price manipulation; and reduced ownership concentration which encourages good governance. In addition, the SEC explained that higher public ownership supports the attraction of capital as it increases the free float market capitalization, enhancing the Philippines' relative weight in globally tracked free-float adjusted market capitalization-weighted indices.

Exciting times are ahead with this new free float rate, especially regarding the response of the dominant Philippine companies included in the PSE indices.

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For more of Dean Nilo Divina's legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cabdo@divinalaw.com.