25% float – too good to be good

I have a piece in today’s Economic Times on the minimum 25% minimum public float on listed companies imposed by the finance ministry. Public float is defined as that part of a listed company’s shares that are not held by the promoter. The proposal to have a minimum public float of 25% sounds eminently sensible, but is too sudden and very badly timed. I recommend the following actions to partially roll back the mandate:

“This move comes at the worst possible time in modern history. Given the international financial crisis showing no signs of ebbing, and the governments internationally in deleveraging mode for at least half a decade more, raising this amount of equity in three years sounds like the government is forcing sale and dilution at possibly fire-sale prices for both the public and the private sectors. This will be bad for Indian citizens and shareholders as they get diluted much beyond where they would be placed in less volatile times.

If volatility persists and valuations remain as subdued in the next two years as in the past two, the divestment would result not only in Indian shareholders (including the government ) losing out, but cash-rich sovereign wealth funds and opportunistic hedge funds including in the worst-case scenario vulture funds gaining substantially at their expense.

Luckily, a senior bureaucrat has demonstrated the finance ministry’s willingness to reconsider the change in law. Here is what this author suggests: defer the decision, till the dark clouds of the financial crisis no longer loom over the Indian horizon. Much as we would like to celebrate a return to the 9% growth trajectory, caution in necessary on this front. Second, give a substantially-longer period to comply with the norm. Third, offer a tax or other benefit to companies that list and comply with the norm as opposed to those which do not. Given the substantial costs of compliance for a listed company and the benefits of a well-governed listed company for the economy, there is a need to offer a carrot for companies that list. Lastly, there is need to get the full Cabinet on board so that public sector also abides by the same law as the private sector — and there is no repeat of the non-compliance by public sector listed companies with even the most basic of the 2006 corporate governance norms set by Sebi remain violated till today.”