The government has proposed increasing the minimum public shareholding from 25 percent to 35 percent. This move will impact more than a thousand companies across all categories.
However, public sector undertaking have not yet met the earlier deadline of 25 percent minimum public shareholding (MPS).
Two years back, the Securities and Exchange Board of India (SEBI) discussed this measure at one of its meeting at the National Stock Exchange on corporate governance. In that meeting, most stakeholders proposed increase in the minimum public shareholding from 25 percent to 35 percent to raise shareholder participation.
In today’s Budget presentation, Nirmala Sitharaman proposed to increase MPS from 25 percent to 35 percent. And this move will impact 1,198 companies. Of the top 500 companies on the Bombay Stock Exchange (BSE), 167 companies would need to divest their stake. To divesting this same, stake worth Rs 3.5 lakh crore will come into the market for sale.
In the largecap space, these are the main companies where promoter holding are more than 65 percent. These include Tata Consultancy Services (TCS), Hindustan Unilever (HUL), Wipro, Bharti Airtel, Coal India, HDFC Life, Vodafone Idea, DLF, ABB India and Avenue Supermarts.
Amit Tadon, co-founder of Institutional Investor Advisory Services, a proxy firm, said: “At present, the Finance Ministry has asked SEBI to examine the merits of a minimum 35 percent free float. The market has moved from 10 percent to 25 percent. If you want the increase market float, I will argue the benchmark should be defined in terms of market-cap, i.e. only companies with a low m-cap could be asked to increase free float.”
In 2010, the government set the minimum public shareholding at 25 percent. The Finance Ministry had set a deadline of June 2013 to complete this process. In 2014, the government issued a notification to PSU companies to comply with the 25 percent shareholding till October 2017.
Still, 30 companies are yet to comply with this norm, including Coal India. PSUs are getting an extension for complying these norms and the final deadline is expiring in August next year. For private companies, SEBI put a penalty of Rs 5,000 a day for not complying with this measure.
Explaining the significance of the move, Advocate Deepak Sancheti, former General Manager at SEBI, said, “The proposal for increase in MPS from 25 percent to 35 percent has both pros and cons. On the pro side, it will result in a larger floating stock, which can increase liquidity and bring in more realistic valuations. Higher liquidity will add depth to the market, which still remain shallow as compared to mature developed markets. On the downside, promoters will be forced to reduce shareholding, leading to lesser skin in the game and lower returns for promoters, especially for companies which are early in the growth cycle, relatively small and have low valuation. SEBI may need to look into bringing more nuance into this requirement, considering both growth stage and size of the listed company.”
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