25% public holding must for all listed cos: Govt

The government has raised the threshold for public shareholding in listed companies, reports CNBC-TV18's Siddharth Zarabi. Finance Minister Pranab Mukherjee in his Budget speech for 2009-10 had proposed to raise the threshold for public shareholding in all listed companies to 25%.

The Securities Contracts (Regulation) (Amendment) Rules, 2010 have been notified today. As per the amendment, all listed companies will need to have a minimum 25% public holding.

Companies, where the public holding is less than 25%, will have to reach the minimum level by an annual addition of not less than 5%. If they fail to do that, they will have to restore the 25% public holding in one year.

For instance, a company with already 21% public holding can do it within a year and take it to 25%.

The move will not impact companies looking to list. Companies with pending initial public offering nod can go ahead without 25% public shareholding. But they will have to later comply with the new norms by increasing public shareholding by at least 5% per annum.

The logic given for this by the Finance Ministry is primarily to increase the depth of the market and to prevent manipulation.

Meanwhile, sources in the Finance Ministry said that no company will be exempt from the minimum public holding norms. "All waivers have been done away with. There will be no case by case exemption."

They do not foresee a flood of issues crowding the market.

Sources said companies are free to choose the best dilution process between a follow-on public offer or qualified institutional placement.

Standard provisions would apply for violation of Securities Contracts (Regulation) rules. They confirmed that the provisions apply to both private and public sector understanding (PSU) companies.

The ministry, they said, has taken no view on multi-national companies that may seek to delist. Also, inclusion of foreign currency convertible bonds to calculate public shareholding will be taken up later.

The Finance Ministry feels that the reform can broadly be described as a step to ensure that a widely held company is less difficult to manipulate than a company that is closely held.

The Ministry, sources said, considered various timeframes and found the three-year period as optimal and reasonable. "If we raised it by 15% in one go, the markets would have been shocked. And five years is too long a period to raise this limit."

CNBC-TV18 learns that the move has been vetted by the Law Ministry and has been approved by the Finance Minister.

A government press release said a dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to investors and to discover fair prices. "The larger the number of shareholders, the less is the scope for price manipulation by promoters."

With this decision, India in effect is moving closer to more developed economies where the minimum public shareholding level is something that is followed and maintained.