Bring Up Public Holdings

The SEBI has directed all listed entities to ensure that they bring up their public shareholding to a minimum of 25 per cent. While the move is good to ensure a liquid and more better price discovery for stock prices, there are difficulties that companies are likely to face while adhering to the norm says Prasanna Bidkar.

The Indian stock market has changed a lot from what it used to be around two decades ago. Gradual changes and reforms brought in by the Government and the SEBI for the development of the stock market have played a pivotal role in the same. In a series of such events there was a major reform, when in 2008 SEBI ordered all listed companies including PSUs to ensure that a minimum of 25 per cent of their shares be publicly held. While for the private companies the time frame was three years, it was five years in the case of public sector entities. The norm that SEBI intends to enforce is in-line with what is followed in developed economies globally. For instance, the London Stock Exchange requires a minimum public shareholding of 25 per cent.

The Rationale behind the Requirement

The proposal to ensure a 25 per cent public holding was based on the idea that 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. Further it was a long-standing demand from corporate governance activists who strongly feel that a low public float made it easier for the controlling shareholders of Indian companies to manipulate stocks by buying and selling small volumes of shares. As the deadline (June 2013) nears there are many companies, where the promoter holding still is as high as 75 per cent or even more. In our opinion, although SEBI had provided sufficient time for the reduction of stake or rather for bringing up public holdings in the overall shareholding pattern, very few acted on the same With a strong reminder of the diktat having been recently sent by the SEBI to corporate India and the deadline fast approaching many companies are likely to be caught at the wrong end of the law as they fail to stick to the guideline. It will mean a violation of the regulation further leading to compulsory de-listing of the companies.

The Difficulties in Implementation

We feel the move to increase the public float in difficult market conditions (like what it is now) could impact valuations. Data suggests that, around Rs 60000 crore may be offloaded by private companies in one year to meet the guideline. With equity markets already struggling, we feel the new issuance will only have a negative impact on the markets. Even though an option of Institutional Placement Programme (IPP) is available, where companies can offer up to 10 per cent of their holding to institutional investors it will not serve the purpose. This was visible in the recent FPO of ONGC which was carried out through the auction route and witnessed a dull response. Multi National Companies (MNC) and Public Sector Units (PSU) are particularly expected to be impacted. There are 140 companies (Based on Shareholding Pattern as on 31st March 2012) where the promoter holding is more than 75 per cent of which 25 are PSU’s and 20 are MNCs.

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Problems of MNCs

The enforcement of shoring up public holding to a minimum of 25 per cent has virtually triggered fears that global companies would not be interested in remaining listed on the Indian bourses any more. Some companies like Alfa Laval and Astrazeneca have already started the buyback of their shares and a few others are also likely to join them.

Further, MNCs announce consistent dividends and promoters receive higher dividends on account of a higher stake holding. In FY11 the Dividend received by MNC Promoters was only next in quantum to that received by shareholders of PSUs. So, MNC promoters will not let go of this advantage. As a result, with most of the MNCs being cash rich and hardly needing funds from the capital markets, not many will be interested in diluting their stake. This is likely to see some more delistings happening in the MNC space. In a situation where more foreign capital is the need of the hour, this may act a negative factor.

On the investor’s part, some investors take a view that de-listing especially by MNCs could lead to immediate gains. However we feel it comes at the expense of long-term profit opportunity. If they (MNCs) are forced to depart from domestic bourses, it may bring temporary gains by way of attractively priced de-listing offers, but will not be favourable to investors from the long-term point of view. So this advantage will be gone for the Indian investors. Altogether there are 20 MNCs listed in India, whose public shareholding is less than 25 per cent. Considering the nature of the MNCs, their foreign parent companies may not be willing to offload their stakes. Probably, they may have to choose the route of delisting, resulting in a mass departure of large MNCs from the domestic stock markets. This reminds one of a scenario way back in 1973 when the Union government then had come up with a rule directing foreign companies to sell a majority holdings to locals, which led MNCs like IBM and Coca-Cola to exit the country.

However the counter argument is that the MNCs are delisting even otherwise, the recent examples being those of Cadbury, Reckit Benckiser and Wartsila who have bought out minority shareholders. Is this good for the Indian market per se? We don’t think so. It is bound to reduce the depth of the Indian market going forward. More so, why should Indian public not be allowed to participate the riches of capitalism? Is it a correct strategy to let MNCs milk Indian markets for their own advantage? We don’t think so. It is time that regulators and the government ensure that delisting as a tool to get away from the rule of the land is not used by MNCs as this would mean giving the Indian public a raw deal.

PSU- A long list and a long wait

In view of the current market conditions even PSUs who have smaller public holdings are worried especially after the recent ONGC fiasco. The market has been going nowhere with the government not taking adequate measures to ensure that it perks up again. Policy paralysis at the centre and many other factors have kept the market rather subdued which has led to a scenario where in fiscal 2012 even the government found it difficult to meet its divestment target of Rs 40000 Crore. There are around 25 listed PSUs having a public float of less than 25 per cent. In Certain cases like Hindustan Copper, MMTC, HMT and National Fertilisers it is as low as three per cent (Promoter stake here is higher than 97 per cent). With no changes in the market conditions we feel, it will be extremely difficult for the Government to meet the target and hence the guideline.

In case of many private Indian companies too, a dilution will be required. While there are few with a lower equity base, larger ones like Wipro (78.41 per cent) and Reliance Power (80.42 per cent) also feature in the list where promoter holding is more than the stipulation. Either the promoters will have to sell their shares or these companies will have to issue fresh shares only to public (nonpromoters) to gradually meet the 25 per cent public holding norm. Hence, companies with a higher equity base will find it difficult to dilute their holdings. Also, troubled industries like Realty and Jewellery usually have higher promoters holdings and they will find themselves in more trouble trying to adhere to the set norm. The difficult industrial scenario in these sectors may also make dilution difficult for these players.

A good move – But a Right Perspective Needed

No doubt that the government’s intent to enforce a higher public float is good. Nearly 140 of the 4500 listed companies in India have less than 25 per cent public shareholding. But, like any regulatory change, this will also require various qualifications and perhaps some fine-tuning. We feel, for a country that is deeply starved of capital any measure that improves liquidity, price discovery; depth in the market and governance can only be seen as highly desirable one. The new rule provides greater price discovery and will reduce market volatility, thereby providing incentive for more retail participants to enter the market. We hope good sense prevails while enforcing the regulation with a good intent.