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Mandatory 25 percent public shareholding / float for listed companies – How it impacts you

The government has mandated that all listed companies in India need to have at least 25% public shareholding. How does it impact various companies, and what does it mean to you? Read on.

The government has announced on 4th June 2010 that all listed companies in India should have a minimum 25% shareholding by the public. This has been done by amending the Securities Contracts (Regulation) Rules.

This is in line with the practices followed globally, including developed countries. It is a major step, and can have huge implications for the listed companies, the market in general, and you.

 

Details of the announcement

  • All listed companies should have at lease 25% public shareholding
  • If a company has less than 25% public float, it would have to offload 5% of its shares every year till it reaches the threshold of 25% public shareholding. Since the current minimum public shareholding is 10% for most companies, this effectively means that the companies have a maximum of 3 years to comply with this rule. (Maximum of 5 years for PSUs)
  • If the public shareholding falls below 25% for a listed company, it would have to increase it to 25% within a period of 12 months
  • All companies filing draft prospectus with the Securities and Exchange Board of India (SEBI) would need to dilute at least 25% stake in Initial Public Offerings (IPO) if the issue size is upto Rs 4,000 Crores
  • For issues of over Rs. 4,000 Crores, the issue can be for 10% of the equity shares. However, it would need to be increased to 25% by divesting additional 5% for 3 subsequent years.
  • These guidelines are applicable to all listed companies, including Public Sector Undertakings (PSU)

 

Implications for you

 

Flood of issues in the market leading to pressure on share prices

This is a very important implication of this notification – and can greatly impact you.

There are over 4,500 listed companies in India, out of which about 179 (including about 35 PSUs) do not comply with this rule today. So, obviously, these 179 companies would need to come to the market with follow-on share issues so that they can comply with this notification.

Considering the current market prices of the stocks of the companies that would need to dilute the promoter stake and increase public shareholding, this could mean fresh issues of Rs. 1.6 Lakh Crores to Rs. 2 Lakh Crores.

And that’s a HUGE amount! (Of course, this would be spread across 2-3 years – but it still is a very large number). To put it in perspective, companies have raised between 0.5 to 0.6 Lakh Crores on an average every year through various share issues in the past 5 years.

Where would the money for such a huge investment come from?

Some of it would be fresh money coming into the stock markets. However, a lot of it might just be money churned away from other stock investments – people and Mutual Funds (MFs) can sell other shares held by them in order to buy shares from these public offers!

And what does this mean? The stock prices of other listed companies can come under pressure due to this selling!

If this actually happens, it would be a reduction in share prices created by artificially high supply of shares, and not because of any change in the fundamentals of the companies. Thus, it could be a great buying opportunity for long term investors. So, keep your eyes open!

(Equities are best for long term investments – to find out more, please read “Stocks – The winning bet for the long term” and “Equity Investment is Risk Free – Here’s the Proof”)

 

Better pricing and less price manipulation

Since there would be a lot more shareholders for a company going forward, it would take a lot more money to manipulate the stock price of a company. Thus, the possibility of someone deliberately manipulating the share price becomes considerably less.

Also, since there would be a lot more people participating in IPOs, the pricing of new stock issues would also be better.

 

More liquidity, better price discovery

More shares available for trading means more liquidity. And this leads to better price discovery for the stock – and lower spread (difference between bid and ask price).

 

Some delistings

Promoters of some companies may not be comfortable with high public shareholding in their companies. Therefore, instead of complying with this rule to stay listed at various Indian stock exchanges, they might prefer to buy back any public holding and delist their companies.

 

More disinvestment in Public Sector Undertakings (PSU)

Many PSUs do not meet the 25% public shareholding norm today.

This means that they would have to come up with equity issues as well – which means more PSU shares available to you for investment, and more disinvestment money for the government!

 

No timing of issues for companies

Since following this rule is mandatory, the companies would have to compulsorily come out with public issues – irrespective of the market conditions.

Ideally, companies like to raise money through public issues when the markets are high, so that they can price their shares higher and get more money. Now, companies would not have this luxury as they would have to come out with public issues irrespective of whether the stock market is high or low.

 

Some large companies that are impacted by this notification

  • Indian Oil Corporation (IOC)
  • National Mineral Development Corporation (NMDC)
  • DLF
  • Wipro
  • National Thermal Power Corporation (NTPC)
  • Oil India Limited (OIL)
  • Steel Authority of India Limited (SAIL)
  • Reliance Power
  • Essar Oil

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