25% SHARES IN ALL LISTED COMPANIES TO BE PUBLIC OWNED

The finance minister has put his seal of approval on a proposal that could willy-nilly lead to disinvestment in many of India’s biggest listed public sector companies starting as early as April 2010.

Pranab Mukherjee has okayed a plan that will make it compulsory for at least a quarter of the shares in all listed companies to be owned by the public, including investment and financial institutions. Government-owned and private companies in which the founders own more than three-fourths of the shares will be required to increase the public float by 5% annually until at least 25% of the shareholding is in the hands of the public. A senior government official with knowledge of the plan said the rules could come into force from the next fiscal year after the law ministry approves it.

The new rules will affect public sector companies like Steel Authority of India Ltd (government stake of 85.82%), Minerals and Metals Trading Corp (99.33%) National Mineral Development Corp (98.38%) and State Bank of Mysore (92.33%). Private companies in which the founders own over three-fourths of shares include Puravankara Projects (89.50%), Ackruti City (89.96%), Wipro (79.22%), Jet Airways (80%), Nirma (77.17%) and Novartis (76.42%). There are 150 big firms where promoters own more than 75%, including 25 state-owned enterprises. If they issue shares to meet the planned regulatory requirement, these firms could together raise nearly Rs 1.5 lakh crore at current market prices, including about Rs 1.2 lakh crore by the 25 government-run firms.

Mr Mukherjee had announced the government’s intention to raise the non-promoter stake in listed firms when he presented the budget last month. The option before him was to require companies with a low public float to raise their public shareholding annually by 3-5% until the minimum threshold of 25% was achieved. Officials said the minister had settled for an annual increase of 5% so that companies reach the threshold faster. A top SEBI official said the market regulator is in agreement with this proposal and had only made it clear to the government that there should be no discrimination between the public and private sector companies when it comes to implementing the rule. Currently, at least a quarter of a company’s shareholding has to be with the public, but state-run firms and those operating in sectors such as IT, infrastructure, telecommunications and media are covered by exemptions.

While the government is of the view that the planned new rules will widen the investor base, improve liquidity and reduce scope for manipulation, corporate India has made it clear that it is against compelling promoters with large shareholdings to dilute their stakes below 75%.Prithvi Haldea, who runs primary market database provider Prime Database and is a member of the primary market committee of SEBI, said there has to be a separate dispensation for state-owned companies considering that their owner is the government, which does not manipulate markets. He also argued that not many global jurisdictions globally insist on such public float norms.

In Singapore, the norm for continuous listing is that 10% of the stocks should be held by the public while in Hong Kong it is 25% or 15-25% if the market capitalisation is over Hong Kong $10 billion. In the UK, it is 25% for continuous listing and in the US, the Nasdaq stipulates a public float after listing of 0.75 million publicly-held shares and the NYSE 1.1 million publicly-held shares. The Left parties too had raised objections last year saying the move appeared to be a ploy to ensure divestment through the back door. But the fact is that once these rules come in to force, several companies would have to approach the capital markets to dilute their promoter holdings by launching follow-on offerings.

An argument by corporates and investment bankers when the proposal was opened to public debate last year was a higher level of public shareholding would result in the market being flooded with paper. This has not cut much ice with the government or the regulator as they believe that investors would have a wider choice of stocks to pick from once the new rules are implemented.