Major IT firms Wipro and TCS may have to dilute their promoter stake if the Budget proposal to increase public shareholding to 35 percent goes through.
In Budget 2019, Finance Minister Nirmala Sitharaman said that the government has recommended that the Security and Exchanges Board of India (SEBI) look at increasing the public shareholding to 35 percent from existing 25 percent for listed companies.
TCS and Wipro have promoter shareholding of 72.05 percent and 73.8 percent respectively. This is well below the 35 percent recommended.
According to a report by Jefferies Equity Research, a computer services and IT consulting firm, though the move is still at proposal stage, if such a rule is enforced, it would require significant stake sales by the promoters of TCS and Wipro.
TCS and Wipro will have to dilute close to 7.05 percent and 8.8 percent shares respectively. According to the report, the potential offer size for shares would be close to $8.3 billion for TCS and $2.2 billion for Wipro.
Other IT companies that have over 65 percent promoter shareholding include L&T Infotech and L&T Technology Services.
What would it mean for companies and investors?
Shriram Subramanian, founder and MD, Ingovern Research Services, a proxy advisory firm, said that this increase in public shareholding will lead to better liquidity for investors.
"But a few large Indian companies and most MNCs would be affected by this minimum public shareholding agreement," he said.
As promoters of large companies are forced to offload shares, it could depress share prices too, he added.
Subramaniam said: "MNCs may explore alternative of delisting."
However Rajesh Gopinathan, CEO, TCS, said that the company has nothing to share at this point on minimum public shareholding as it is investor-led.
The Budget also announced tax of 20 percent on buyback of shares effective immediately.
IT majors have been using the buyback route for returning excess cash to shareholders given its tax advantages. Currently buybacks are not taxed, whereas dividends attract a tax of 15 percent.
According to a Jefferies Equity Research report, over the last three years, top five IT firms have returned $12 billion.
Last year, TCS announced buyback worth Rs 16,000 crore and HCL Tech kicked off its Rs 4000 crore buyback in September 2018. Recently Infosys announced close to Rs 8000 crore buyback. Close to 60 percent of the buyback has been completed, Salil Parekh said in its 38th annual general meeting last month.
"Going forward, IT services companies will need to decide whether they still want to opt for buy-back route given limited tax advantages," the report added.
Another analyst said more companies will probably take the dividend route.