Requirement of Public Holding for Listing

A large number of shares distributed among a large number of shareholders are essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. The larger the number of shares and the number of shareholders, i.e., the larger the public float, the less is the scope for price manipulation. For example, if the promoters are entitled to, say, 90% of the stock, it may result in concentration of shareholding up to 90% in the hands of a select few and the consequent shrinkage of floating stocks in the secondary securities market. Given the imperfections inherent in the securities market, this could make the security susceptible to price manipulation to the prejudice of the interests of the investing public and defeat the prime objective of the SCRA (The Securities Contracts Regulation Act, 1956) of preventing undesirable transactions in securities. The minimum public float provides an opportunity to the general public to have a share in the increased wealth generated by the competitive private enterprise and prevents cornering of the benefits flowing from the policies of the Government and public institutions by a handful of promoters. Any requirement of too high a level of public float discourages closely held well-run profit making companies from going public. While the promoters want the benefits of listing, they are generally averse to giving a large share in the capital/ control to the public. A very high level of public float also acts as disincentive to private enterprises. It is, therefore, desirable that the promoters are not only allowed to have a reasonable minimum stake, it should be insisted upon them to accept and retain a reasonable minimum stake in the capital of the company on a continuous basis to demonstrate their interest.

A minimum offer is generally prescribed at the time of initial listing while a minimum float is prescribed for continued listing. These are also relaxed in the public interest. These are prescribed in terms of a percentage of issue size, number of securities or value of securities or any combination of these three. The prescription in terms of the value of public offer has no meaning in view of the high volatility in the prices of the securities in the market.

Amendment to The Securities Contracts (Regulation) Rules, 1957 on June 4th, 2010

The Securities Contracts (Regulation) Rules, 1957 (the “SCRR”) have been amended with effect from June 4, 2010 to provide for a mandatory public shareholding of at least 25% for all listed companies going forward (the “Amendment”). The Amendment also sets out the requirements for continuous listing and certain transitional provisions for companies with a public shareholding of less than 25%. However, the detailed guidelines and clarifications are awaited from SEBI

IPO – Mandatory Dilution

With respect to initial public offerings (“IPO”), at least 25% of each class or kind of securities of all companies sought to be listed are now required to be offered and allotted to the public in terms of an offer document. 
The following companies would, however, be eligible for an initial dilution of 10% subject to subsequent compliance with the 25% public shareholding requirement within the time-period and in the manner as set out in the table as under:

• companies whose post-issue capital calculated at offer price (i.e. the product of the total number of issued shares (post issue) and the offer price in the IPO) is more than Rs.4000 crores; or
   
• Companies which satisfied the requirements set out in Rule 19(2) (b) of the SCRR prior to the Amendment and whose draft offer document was pending before SEBI as of June 4, 2010. 
   

Time Period:

  
Conditions for Continuous Listing (Rule 19A) :

All listed companies are required to maintain a public shareholding of 25% as a requirement for continuous listing. In the event the public shareholding falls be-low 25% at any time, the company has a period of 12 months from the date of falling below 25% to increase the public shareholding to at least 25% in the manner specified by SEBI. Certain one-time timing relaxations by way of transition provisions (as set out in Table as above) have been pre-scribed for companies which:

• as on June 4, 2010 have less than 25% public share-holding; and 
   
• in terms of the Amendment, are permitted to offer and allot only 10% to the public at the time of initial listing.
   

Manner of Increasing Public Shareholding

The mandatory increase in public shareholding pursuant to the Amendment is required to be in the manner specified by SEBI. While the notification from SEBI is still awaited, some options to increase public shareholding have been discussed as under:

Dilution:

• Follow-on public offer of new shares to the public through prospectus: This option is permitted under Clause 40A of the listing agreement and is likely to continue to be available to listed companies. The listed company would, however, continue to be subject to applicable criteria under the ICDR Regulations (Issue of Capital and Disclosure Requirements) Regulations, 2009)
   
• Qualified Institutional Placement (“QIP”) / Preferential Allotment: Pending issue of guidelines by SEBI, listed companies may require SEBI clarification to use the QIP/ Preferential Allotment routes to in-crease public shareholding for the purposes of the SCRR since these routes do not involve an issue of shares through a “prospectus”.
   
• Rights Issue: A rights issue where the promoters undertake to not subscribe to any shares or renounce their rights in favor of other public share-holders is a theoretical option for consideration. 
   
• Increase as a result of conversion of convertible instruments: An increase in the public share-holding as a result of conversion of convertible instruments issued by the company into the underlying shares would also count towards the increase in public shareholding under the Amendment. 
   

Rule of Delisting:

Companies which currently have less than 25% public shareholding, also have the option of launching a delisting offer under the SEBI Delisting Regulations. Since there has been no corresponding amendment to the Delisting Regulations, the existing delisting thresholds will continue.

Accordingly, even though minimum public shareholding of 25% will be a requirement for continuous listing, the delisting threshold will be the higher of:

• 90%; and
• the pre-delisting offer promoter shareholding + 50% (delisting offer size)

Companies which launch delisting offers and fail to reach the delisting threshold would still have to en-sure compliance with the 25% public shareholding requirement within the specified time period.

Penalties for Non-Compliance

Companies failing to comply with the minimum level of public shareholding within the time period set forth could face penalties such as compulsory delisting, suspension of trading or a fine of Rs. 25 crores and/or prosecution.

A cross country comparison of initial and continuous listing requirement is given below:

* Publicly held shares is defined as total shares outstanding, less any shares held by officers, directors or Beneficial Owners of 10% or more.