07 June 2010

25% minimum public float for listed co

The proposal to mandate a minimum 25% public float has been around since the budget of 2009 when the finance minister announced it. The proposal is now a law - the amendment to the Securities Contracts (Regulation) Rules 1957 have been amended to provide for each company to have at least a minimum public holding of 25%. See the actual amendment here.

While, this seems like a good amendment in the long run with deeper markets and easier access to capital flowing to all because of the depth of the market - there are several problems with the amendment:

  • 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.
  • Finally, the biggest problem is - this move comes at the worst possible time in modern history. Given that it requires companies to comply within 3 years at most (5 years for some public sector companies), and given the international financial crisis showing no signs of ebbing, and the governments internationally in de-leveraging mode, raising this amount of equity in three years sounds like the government is forcing sale at possibly fire-sale prices. This is bad for India Inc and bad for the public sector.

A sensible approach would have been to wait for the looming crisis world wide to subside for good and only then approach this issue - and even then give at least 5 years for companies to comply with the requirement. Luckily, there is some ambiguity in Rule 19A - which seems to permit dilution by promoters by sale in the market rather than dilution of equity by the company itself. Though, this will be clear only once SEBI comes out with supporting regulations or circulars (as it is mandated in Rule 19A).

See also Umakanth's views on the subject.

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