Good idea, bad timing

The idea of a minimum level of public shareholding in listed companies is not new. Until the early 1990s, promoters of listed companies were not allowed to hold more than 40 per cent of the paid-up capital.

This was subsequently relaxed to allow up to 90 per cent promoter holding. The latest amendment requires a minimum public float of 25 per cent in listed companies, irrespective of what requirements applied to them at the time of their initial listing.

Listed companies where promoter holding exceeds 75 per cent have to sell to the public, diluting five per cent per year until the stipulated minimum public float of 25 per cent is achieved. At a conceptual level, such a requirement is laudable. Among the long-term advantages of a higher public float are increased market depth, enhanced liquidity, better price discovery, and improvement in corporate governance.

When companies sell their holding to meet the enhanced minimum public float, it should result in a more dispersed shareholding, lowering opportunities for collusive market action. The resultant increase in liquidity would enable small investors to buy or sell shares at prices that are discovered in a fair manner. Reduced concentration of ownership also encourages good governance.

At a more pragmatic level, too, there would be significant long-term benefits. A higher public holding would increase the free-float market capitalisation of the Indian market. As a result, India's weightage in the globally tracked free float-based emerging market indices would increase. This, in turn, should lead to a rise in foreign inflows.

Government-owned companies will account for the bulk of the issuances to comply with the new minimum public float norm. If the government chooses to bring down its shareholding in 29 listed companies where it owns over 75 per cent through stake sales, it could raise more than Rs 1.2 lakh crore over the next five years.

This would help the government to consolidate its fiscal position further, after raising over Rs 1 lakh crore from the auctions of 3G and BWA spectrum. Stake sales in MMTC (government holding: 99.3 per cent), NMDC (government holding: 90 per cent) and NTPC (government holding: 84.5 per cent) alone would help raise over Rs 70,000 crore.

However, the requirement of a higher public float is not trouble-free. There would be a glut of issuances to meet the new guidelines. In the near term, the incremental equity issuance is likely to create an overhang in the secondary market. To comply with the new norm, companies would have to raise over Rs 1.5 lakh crore. This is three times the average of Rs 50,000 crore raised annually through equity issues, including IPOs. Not only will companies/promoters seeking to comply with the new guidelines find it difficult to do so, companies with a genuine need for capital, too, might find it difficult to raise resources.

Given the current global financial crisis, this is not the best time to have introduced this norm. It might have been more sensible to wait for the global crisis to subside for good. But then, there always are some notso-desirable fallouts and some pain associated with any change.

Promoters do not need to bring down their holdings at one go. Staggered dilution would help take away some of the pain, though the valuations realised may still not be in line with promoters' expectations. The guideline of five per cent dilution per year gives most companies three years and some government-owned companies five years to comply. If this were revised to 2-3 per cent dilution per year, it could make things easier.

Another fallout might be that some companies with low public float would choose to buy back the small portion of shares in public hands and go private. However, in my view, there would be very few such instances. A listing on Indian bourses is not just about raising money, but, perhaps, more significantly for enhancing brand value — the recent issue of Indian Depository Receipts from Standard Chartered Bank is a case in point.

— The author is the Chairman & MD of Motilal Oswal Financial Services