Reduction in free float

Over the past years, I had made several attempts at highlighting the need to reduce the minimum percentage holding of shares which must be in public hands which is often referred to as the ‘free float’. My last article addressing this need was published in February 2024 wherein I had opined that “the reduction in the free float requirement is one of the many reforms that need to take place across the capital market to hopefully instil greater enthusiasm among the investor community and generate added participation including additional companies seeking a listing on the MSE”.

I had also mentioned this in my keynote speech at the first MSE Capital Markets Roundtable exactly a year ago in June 2024 in the presence of the Minister of Finance and top executives of the Malta Financial Services Authority (MFSA).

The EU Listing Act was published in the Official Journal of the European Union on 14th November 2024. One of the amendments made through the Listing Directive to MiFID II includes a revision in the minimum free float requirement for admission to trading on a regulated market. In terms of the MFSA’s Capital Markets Rule 3.26, the current minimum free float level is 25 per cent. However, the new Listing Directive decreases the minimum free float requirement from 25 per cent to 10 per cent, assuming that such a threshold generally ensures a sufficient level of liquidity in the market.

In this respect, on 16th June 2025, the MFSA issued a Consultation Document to gather views on the proposed revision of the free float and the corresponding requirements being planned in Malta. It is indeed positive that the MFSA has been proactive in this important matter and did not delay such a proposal until early next year ahead of the transposition of the Listing Directive by 5th June 2026.

The intention of my article today, given the space limitations, is not to debate whether the proposed bands of the MFSA (essentially a free float of between 10 per cent and 14 per cent for a company that has a minimum total market capitalisation of €100 million and a minimum number of 200 investors) are the ideal ones or whether other minimum market cap requirements could achieve a better result given Malta’s dynamics.

Instead, the focus of my article will be to reinforce my view that the reduction in the minimum free float to 10 per cent should instigate large companies to obtain an equity listing on the MSE and the benefits of this to the entire investor community and also to the wider economy.

The largest company on the MSE is currently Bank of Valletta plc with a market cap of just under €1.2 billion followed by Malta International Airport plc at €800 million and HSBC Bank Malta plc at €490 million. There are then another 8 companies having a market cap between €100 million and €300 million with all the rest being below €100 million.

The addition of other large capitalisation companies (of say above €250 million) to the 11 large and mid-size companies currently on the MSE could be an important catalyst to hopefully instil greater enthusiasm among the investor community and generate added participation following the very challenging times for the Maltese equity market over the past few years. The clear disgruntlement among the small shareholders was also very evident in most AGMs held recently.

As I advocated in the past, the attraction of other large and mid-size companies to the equity list will lead to important changes in the weighting of such companies in the indices computed by the MSE tracking the performance of the local equity market. Assuming that the new candidates seeking an equity listing have the right fundamentals (revenue growth, profit margins and return on invested capital) and the shares are issued or offered at an attractive price leaving good upside potential for the incoming investors then I believe that a company of this nature with a meaningful weighting will be successful in attracting larger investors, institutional players and other family offices back into the market as they continually seek to participate in the ‘right’ companies around.

Unless the minimum free float requirement is reduced to 10 per cent, potential candidates of a certain size would not be able to achieve a successful listing. The current 25 per cent limit in place invariably precludes these large and mid-size companies given the natural restrictions of the size of the domestic capital market. As such, in my view, the amendments to the Listing Directive that hopefully will shortly be transposed in Malta, are definitely a step in the right direction since the free float will be based on the monetary value of the market capitalisation and not as a percentage of the share capital (as currently applies) irrespective of the total market capitalisation.

Incidentally, from research conducted across a number of small exchanges across Europe and beyond, there was also acknowledgement that apart from the size of the free float and the number of shareholders within a company, there are other variables that are potentially also very important. These include the presence of market makers, the weighting or inclusion in an index (across many markets overseas the size of a company and other credentials determine the inclusion in the main indices) as well as the coverage provided by financial analysts and investor relations efforts by the company.

This is precisely what I have been advocating for a while across the media as well as in various forums discussing the state of the capital market and initiatives to improve liquidity and wider investor participation.

The presence of liquidity mechanisms such as company buy-backs as well as issuer market making together with the introduction of liquidity providers are indeed fundamental to encourage large investors to participate with the knowledge of a potential exit route in mind.

Many companies in Malta fail to appreciate the importance of a well-devised investor relations and communications strategy. An investment in this area throughout the lifetime of a company’s public status is indeed fundamental. Similarly, coverage by financial analysts is also a key requirement mentioned internationally. In view of the strategy by most participants in Malta to limit the investment in this area, local companies should resort to specialised international players to perform this role. This could also indirectly achieve other benefits since the network of such international research providers could attract some foreign investors who may contemplate an investment in certain large companies listed on the MSE. However, the availability of a proper analytical assessment is normally key to achieve participation by sophisticated investors.

The equity market in Malta needs to grow in size and also in depth if Malta wants to adopt the recommendations of the EU’s Savings and Investments Union to have investors channelling their savings into productive investments and in the meantime offering better financing options for companies. If these investment opportunities do not become available locally by attracting a number of other successful Maltese companies to the equity market, then capital flight will intensify further to the detriment of the local economy.

Once again, I call on the authorities to devise a well-structured vision for Malta’s capital market by taking these various developments into consideration. The ingredients are there to obtain a deeper capital market. However, coordinated action by various stakeholders is fundamental to bring all elements into action.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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