25% public holding: Sebi must fine promoters, not investors

Moneycontrol Bureau

The Securities and Exchange Board of India (Sebi) is contemplating legal action/trading restrictions against companies that do not comply with the June 2013 deadline for ensuring minimum 25% public shareholding (August 2013 for state-owned companies), The Economic Times has reported.

The report says that delisting of the stock/shifting it to the trade-for-trade segment are among the penalties being considered. Other possibilities include prosecution of promoters and directors.

In Moneycontrol.com’s opinion, the regulator should avoid any measure that ends up penalizing minority shareholders along with the promoter(s).

Delisting is not an option to be even considered, as it impacts minority shareholders the most. Similarly, shifting shares of the non-compliant company to the trade-for-trade segment does not seem like a wise idea. Every transaction the trade-for-trade segment has to be settled compulsorily; no transaction can be squared off intra-day. So if an investor has sold a share, he has to deliver it and if he has bought a share, the investor has to pay for it. This causes trading volumes to drop sharply, which in turn increases volatility.

The proposal for 25% minimum public shareholding was first mooted in 2001, though the guidelines for were notified much later in 2010. Around 200 listed companies (private and public) have public shareholding of less than 25% at present. Industry bodies have sought a relaxation in the June 2013 deadline, but Sebi chief UK Sinha has made it clear that no extension will be given.

It is not hard to see why promoters are dragging their feet on the issue. Share valuations in most cases are way off the peaks seen during the bull market of 2007-08. In many cases, the stocks are quoting much below the issue prices of the vaunted initial public offerings during the bull market. How does a merchant banker go back to a fund manager offering him the stock at a much reduced priced compared to one asked at the time of the IPO?

Nevertheless, it is not Sebi’s job to ensure that a promoter gets the best valuation. Rather, it is for the promoter to see how best his company can comply with the regulations. Sinha was right when he recently said that it was not Sebi’s case that the stock market has been doing poorly over the last three years.

The Sebi and the finance ministry have done their bit by introducing mechanisms (institutional placement programme, offer for sale) that allows promoters to raise capital while diluting their stake. And the regulator should focus on penalizing promoters in their individual capacity, rather than the company, so that there is more pressure to conform to the deadline.

santosh.nair@network18online.com