Indian companies will be allowed to achieve the minimum 25% public shareholding rule through the allocation of bonus or rights shares, the chief of market regulator Securities and Exchange Board of India (SEBI) UK Sinha said on Thursday.
Indian market regulations have stipulated that all listed companies must have a minimum 25% public shareholding by June 2013. The move would force many controlling stakeholders to pare down their shares, but many companies have failed to meet this because of poor market conditions.
The regulator also announced a slew of measures, including those relating to expense ratios and taxation, to boost the asset management industry, which has been badly hit by sluggish markets and recent changes in regulations.
According to current regulations, all listed companies must have a minimum 25 percent public shareholding by June 2013. The companies will now have the option to do so by auctioning shares to institutional investors or via follow-on share offerings.
The shareholding rule has forced controlling stakeholders of many companies, including software exporter Wipro (WIPR.NS) and real estate developer DLF (DLF.NS), to pare down their shares from more than 75 percent.
But many companies have so far failed to meet the requirement due to poor appetite for equities in a slowing economy and a sharp fall in the share prices of some companies.
"This is a timely change," said Gesu Kaushal, executive director at Kotak Investment Banking, an arm of Kotak Mahindra Bank (KTKM.NS). "The more routes available for this, the higher the chances of companies meeting the deadline."
Among other measures to reform the primary capital market and increase retail investors' participation, Sinha said that companies would not be allowed to raise more than 25 percent of the total IPO size for "general corporate purposes."
The move will help bring in transparency and check possible misuse of funds raised by companies through initial public offerings, investment bankers said, given the vague definition of the terms.
Currently, there is no cap for funds raised for "general corporate purposes."
MUTUAL FUNDS
India's $110 billion asset management sector has been hit by intense competition, volatile markets and regulatory changes that abolished the entry fee, taking away fund managers' ability to incentivise distributors in selling products.
Fund managers used to pass on that entry fee to distributors to compensate them for selling their funds, but regulators had worried it set up potential mis-sales of financial products.
Although SEBI did not re-introduce the entry fee, as widely expected, Sinha said on Thursday it would allow greater flexibility in the use of total expense ratios, which previously had to be categorised and reported to regulators.
Fund managers will now be given freedom to distribute their costs, which essentially would mean they can pass on bigger fees to distributors.
In order to encourage long-term holding, SEBI has decided that exit loads -- the penalties investors have to pay when exiting a fund early -- would be plowed back into the funds, benefitting the remaining customers.
The fund managers would also be able to use the exit loads to charge an additional total expense ratio of 20 basis points, which could be used for marketing or other activities.
"We need to wait for the fine print, but all the initiatives announced seem to be headed in the right direction," said Waqar Naqvi, chief executive of Taurus Mutual Fund.
"What the industry requires is something much more dynamic and structural...these are small steps."
(Additional reporting by Aditya Kalra in NEW DELHI and Abhishek Vishnoi in MUMBAI; Editing by Rafael Nam)
