The annual free float of shares of a listed company is required to be verified by the auditor under provisions of the Rulebook of the Pakistan Stock Exchange Limited (PSX). In this regard, PSX has notified the format of the ‘Independent Reasonable Assurance Report on Statement of Free Float of Shares’ (through Notice No. PSX/N-4829, dated August 16, 2017). 

For the computation of free float of shares, PSX, through notice No. PSX/N-448 (dated January 25, 2017) has notified that companies shall:

• Exclude shares held by directors, sponsors, senior management officers, and associates; and 

• Determine the “associates” based on the definition contained in the Securities Act 2015. 

Definition of associate provided in the Securities Act 2015

‘Associate’ defined in the Securities Act 2015, specifies various relationships of the company. The definition is provided below for reference.

“Associate in relation to:

a) an individual, means

i. that individual’s spouse, son, adopted son, step-son, daughter, adopted daughter, stepdaughter, father, stepfather, mother, stepmother, brother, stepbrother, sister or stepsister;

ii. any company of which that individual is a director;

iii. any company in which that individual or any of the persons mentioned in sub-clause (i), has control of twenty per cent or more of the voting power in the company, whether such control is exercised individually or jointly; or

iv. any employee of that individual; or

b) a company, means another company in which the first-mentioned company has control of not less than twenty per cent of the voting power in that company, and a reference in this Act to an associated person or associated company shall be construed accordingly”.

Concerns have been raised by the auditors that the above-noted definition is broad in scope and leads to practical limitations in the identification and verification of associates for the computation of free float of shares.

Guidance on auditor’s reporting responsibility for the verification of associate

The Auditing Standards and Ethics Committee of the Institute, in consideration of the expanded definition of associate and auditors’ concerns regarding its impacts on their verification of free float computations, suggests following wordings be included by the auditors’ in the Independent Reasonable Assurance Report on Statement of Free Float of Shares:

“With respect to identification of associates of an individual as defined in section 2 (ii) (a) of the Securities Act 2015, we have obtained and relied on management’s representations that are based on written declarations from individuals (i.e. directors, sponsors and senior management officers of the company) about their associates.”

The suggested wordings are for guidance purposes. The format of the ‘Independent Reasonable Assurance Report on Statement ofthe Free Float of Shares’ after including the suggested wordings is attached as ‘Appendix A’ to this Circular.

Members are advised to take note of the above.

Circular 3 – Guidance on the Assurance Report on Statement of Free Float of Shares