On June 4, the Central government notified rules asking listed companies to maintain the percentage of public shareholding at a minimum of 25 per cent. The new guidelines formulated after considerable deliberation are meant to ensure a reasonable public float of shares.
Companies with less than 25 per cent public holding have been asked to offload at least 5 per cent of their shares every year until the target of 25 per cent is reached. If the public shareholding falls below 25 per cent at any time, the company should within 12 months restore the public shareholding to the threshold limit.
Large capital issuers, whose post-issue capital will be more than Rs.4,000 crore, can go to the market with just 10 per cent public holding but they must fall in line by adding to the public portion 5 per cent every year.
The rules have evoked mixed reactions. On the one hand, a dispersed shareholding that a mandatory 25 per cent float should ensure will present fewer opportunities for collusive practices including rigging of share prices. A fair amount of liquidity will also be ensured: small investors will be able to buy or sell shares freely at prices that are discovered in a fair manner.
Points of contention
However, there are at least two points of criticism. First, there will be a glut of shares of companies that rush to the market to meet the guidelines. That is bound to depress their prices. In the present investment climate, a sharp increase in the supply of shares will enhance volatility. Realising this, the government has relaxed the 25 per cent stipulation for companies including public sector enterprises whose post-issue capital will be above Rs.4,000 crore.
Second, the compulsion to keep a minimum public float may be anathema to some companies that are quite content with the present 10 per cent stipulation. For a number of reasons, some listed companies would like to buy back the small portion of shares in public hands and go private. A stock exchange listing exposes a company to greater public scrutiny. Besides, there are costs to be incurred in maintaining a large shareholder list, conducting the statutory meetings, posting final accounts statements and so on. Some of these reasons were cited to justify the action of some large multinational companies to exit from Indian bourses. The apprehension in some circles is that the new minimum public stipulation will give impetus to such moves. That would result in a situation where Indian shareholders miss out on quality MNC stocks. However, the fear may have been exaggerated. The Indian capital market has come of age. Capital market regulation is as good as what obtains in developed countries. As the recent ADR issue of Standard Chartered Bank showed, Indian capital markets matter both for resources mobilisation and perhaps more significantly for enhancing the brand value of the issuer.
Not a new idea
The underlying idea to ensure a minimum level of public shareholding is not new. In fact, over the years, the relative proportions of public and private shareholding have been varied.
While today the minimum public holding could be just 10 per cent, until the early 1990s, promoters could hold no more than 40 per cent of the paid-up capital.
With the balance 60 per cent automatically in the hands of the public, promoters were in a minority even to begin with. That situation led to many sharp practices to shore up the promoters' stake.
However takeovers, especially of the hostile kind, were rare. Besides, most new projects were funded by the all India institutions which ensured a minimum level of promoters' stake and more importantly built into the loan document the provision to convert loans into equity. The institutions were also large underwriters and picked up large chunks of shares through that route. In those days, public interest in equity shares was much less than it is today. Underwriters played a significant role in ensuring minimum subscription.
Exemptions to the 40:60 rule were given sparingly. The one fairly common reason for relaxing the rule was when there was collaboration with a state development agency, which will have to be allotted shares.
Clamour for small floats
It might be a coincidence but the moves to vest in promoters a significant share of the capital gained ground in the reform era. Technology and telecom companies and infrastructure companies argued for a smaller float. Given that technology stocks were hardly the favourites they are now, there was perhaps a case for bolstering the technocrat promoters' stake to preserve control.
The other reason why these companies clamoured for a small public float was to keep their share prices relatively high. It is useful to command large valuations when the growth route is through acquisitions.
Shares also become the ‘currency' when employees' stock options had to be made more attractive.
Will small shareholders benefit from the new stipulations? One is sceptical .There are many other factors besides availability of shares that influence retail investors.
Attractive pricing is one. In the recent IPOs of public sector enterprises, a discount was offered to retail investors but it proved insufficient. The ease and convenience of investing are other important considerations. Reforms have strengthened the capital markets and ensured their integrity.
The volume of business has expanded exponentially. Yet judging by their response small investors do not appear to have benefited.
