It has not taken very long, after the expiry of the deadline, for the capital market regulator, the Securities and Exchange Board of India (SEBI), to crack the whip on companies that have not complied with the minimum public shareholding.
The stipulation that companies already listed on the exchanges should ensure that the public shareholding should not be below 25 per cent is not some arcane stuff, of concern only to market professionals and company secretaries. Both for corporate issuers as well as for investors of all kinds, the SEBI’s moves culminating with its interim order of June 4, 2013, are extremely significant.
In June 2010, the rules were amended to provide for minimum and continuous public shareholding of 25 per cent in private listed companies. The deadline was June 3, 2013, on which date some 100-odd companies were found to be non-compliant. The regulator is now proceeding against them.
SEBI has directed freezing of voting rights and corporate benefits of promoter groups with respect to the excess of proportionate shareholding till such time they comply. Restrictions have been put on their dealing in the non-compliant shares and in becoming directors in other companies.
The larger issue is to examine the rationale of any minimum public shareholding requirement. Should there be any such stipulation at all?
Obviously, it affects corporates as well as their investors.
For the corporates, it could be a question of having greater control over the company. A large, diversified shareholding could cost the company more.
For the retail shareholder, the larger the public shareholding, the greater the chances of owning the share.
Besides, a large float might lessen the chances of stock manipulation by promoters and reduce volatility.
For the regulator, striking a balance between the often conflicting motivations of the corporate issuer and the investor has posed challenges over the past few decades. With financial sector reform, and subsequently the entry of technology companies in the stock market, there have been other points to support the claims of the company as well as the investor.
It would be appropriate to examine the context of the SEBI’s recent moves to better appreciate its significance.
Over the years, the relative proportions of shares to be held by the promoters and the public have been fixed by the government and the SEBI.
The 75:25 rule was not always sacrosanct. For a long time, until the early 1990s, company promoters could hold no more than 40 per cent of the paid-up capital, thus making them minority shareholders from day one.
The balance 60 per cent was to be held by the public.
Only in some rare cases, usually when a government-owned development agency was the co-promoter, could the combined promoter’s shareholding go beyond 50 per cent and that too after making a special application to the government.
Needless to add the arrangement of promoters starting out as minority shareholders was most unsatisfactory. The question of control loomed large and often led to sharp practices to shore up promoters’ share.
In days where the new public issues market was in doldrums, with very little public interest, reserving almost two-thirds of the issue for public did not make much sense.
In the reform era, the emphasis shifted dramatically to vesting with promoter groups a much larger share. In tech companies, the motivations have been to preserve control and keep the price high.
Shares became the new currency to fund acquisitions. Besides, potential acquirers will think twice before bidding for the company. High market prices also make ESOPs that much more attractive and help in retaining employees.
The 75:25 rule is for the present confined to the private sector. While companies having a genuine difficulty might be given extra time, it is doubtful whether, at the end of the day, retail investors really stand to benefit.
Two new models
SEBI had given ample time to the companies to comply. It even introduced two new methods — the Offer for Sale (OFS) and the Institutional Placement Programme (IPP) — to speed up the share divestments. In all these, however, retail investors have not been in the picture at all.
So, the minimum shareholding is welcome, but its full benefits will be reaped over time.