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Who Will Blink? SEBI or India Inc.

| 5/16/2013 9:00 PM Thursday

Bringing down promoter holdings to under 75 per cent was a ruling meant to ensure an increase in the free float of shares and enable fair price discovery. Various contortions are also being allowed to ensure that promoters somehow adhere to the rule. Will the SEBI get tough with companies that fail to meet the deadline? What does all this mean for investors? DSIJ explains

The stock market, for long, has been considered one of the closest examples of perfectly competitive markets. One of the factors to have helped this competitiveness is a large number of buyers and sellers that constitute the ecosystem. To achieve this, a large number of shares should be distributed among shareholders so as to discover a fair price of the stock. It is also assumed that with a large number of shareholders which essentially means larger public float, there is little scope for price manipulation and unscrupulous trading. The concentration of shares in a few hands and a consequent shrinkage of the floating stock have the propensity to lead to undesirable transactions in securities. Beside this, a larger floating stock also serves the purpose of redistribution of wealth in a more equitable manner. This gives the general public an opportunity to have a share in the wealth generated by the listed companies in return for the capital provided to them.

As academic as it may sound, these were precisely the two reasons why in 2009 the then Finance Minster Pranab Mukherjee, proposed to increase the public float in Indian listed companies to a minimum of 25 per cent. On the other hand, any figure more than that would have discouraged promoters from listing their stock and the already listed ones would have probably opted for a voluntary delisting. And hence to balance the interest of both, public as well as promoters, this provision was proposed.

Following this, the Securities Contracts (Regulation) Rules (SCRR) was amended in 2010 to achieve and maintain a minimum public shareholding at 25 per cent by June 2013. However, in case of public sector companies the requirement was limited to 10 per cent of minimum public shareholding with an extended deadline (more details on this are provided in the latter part of the story).

At the end of June 2010, when the SCRR was amended, the average public float in Indian listed companies was less than 15 per cent, which included the entire space of listed companies on the BSE. However, if we consider only companies which are a part of the BSE 500 Index, public holding stood at a mere 8.58 per cent then. Therefore, increasing the public float was seen as an imperative so as to curb all irregularities which were more a result of the lower public holding and eventually allowing the fruits of economic growth to be well distributed among a larger mass.

 

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