Indian Budget 09 - early thoughts - stock markets

The budget speaks of creating deeper public capital markets:

"39. The average public float in Indian listed companies is less than 15 per cent. Deep non-manipulable markets require larger and diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as listed public sector companies. I propose to raise, in a phased manner, the threshold for non-promoter public shareholding for all listed companies."

While the aim of the finance minister is noble, the attempt may backfire. To give the issue some context, Indian regulations have over the years mandated different levels of 'public shareholding' when a company goes public and is listed. This has ranged from 40%, 25% to 10%. The 25% and 10% limits have co-existed for different types of companies, and different types of fund raising. So a company like Wipro has only around 19% in public hands while the balance is with the promoter group. To mandate a higher public shareholding may in fact make companies who wished to list - stay away from the markets. Besides, a company like Wipro, which had been assured of a minimum of only a 10% public float would feel betrayed if it was now forced to divest a larger percentage. Had it known of such a move today, it may never have listed its securities - making the markets less liquid not more.

While I support the move of the minister, I think there should be certainty on the level for the next several decades, rather than a continuous tinkering with the number. Also, for firms which were allowed to raise capital on the assumption that only 10% of the shares need be with public shareholders, they must be given a long time (say 5 to 10 years) to deal with any forced change.