In this paper, dynamic performance of a transformerless cascaded PWM static synchronous shunt compensator (STATCOM) based on a novel control scheme is investigated for bus voltage regulation in a 6.6kV distribution system. The transformerless STATCOM consists of a thirteen-level cascaded H-bridge inverter, in which each voltage source H-bridge inverter should be equipped with a floating and isolated capacitor without any power source. The proposed control algorithm uses instantaneous p-q power theory in an innovative way that devotes itself not only to meet the reactive power demand but also to balance the dc link voltages at the same time. DC link voltage balancing control consists of two main parts: cluster and individual balancing. The control algorithm based on a phase shifted carrier modulation strategy has no restriction on the number of cascaded voltage source H-bridge inverters. Comprehensive simulations are presented in MATLAB/ SIMULINK environment for validating the performance of proposed transformerless STATCOM.