An area that has left an ambiguous trail over the years has been the amount of public shareholding that is required in a company at the time that it embarks on a listing and thereafter on a continuous basis. Numbers for public shareholding limits have, in the past, ranged from 60% to 40% to 25% and finally to 10%.
After a chequered history, the rules have finally resulted in its current position, which are briefly set out here. There are two key time periods during which determination of public shareholding becomes important. The first is when the company undertakes listing of its shares. Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (SCRR) provides that at least 25% of a company’s securities shall be offered for listing at the time of its initial public offering. However, this number can be reduced to 10% subject to 3 conditions, viz.: (i) minimum offer is for 20 lakh securities, (ii) size of the offer is a minimum of Rs. 100 crores, and (iii) the issue is undertaken through the bookbuilding process with allocation of 60% of the issue to qualified institutional buyers. It may be emphasized that these percentages of shares are those to be “offered” to be public – the question of how many shares are actually taken up and allotted are not relevant.
Once listed, companies are required to maintain a minimum public float during the period of listing. This is governed by the provisions of the listing agreement that companies enter into with stock exchanges. Clause 40A of the listing agreement provides that listed companies shall maintain a public float of 25%. However, this number may be reduced to 10% in two circumstances, viz.: (i) a company has offered at least 10% shares to the public (but less than 25%), or (ii) a company has more than 2 crore shares outstanding or its market capitalization is at least Rs. 1,000 crores.
It is clear therefore that the requirements or criteria for public float (i) at the time of listing and (ii) thereafter on a continuous basis are different. Further, not only are these requirement inapplicable to government companies, infrastructure companies and BIFR companies, but SEBI too has powers to waive or relax the applicability of these provisions.
In order to overcome these anomalies, the Ministry of Finance has issued a discussion paper imposing a uniform public float limit of 25% at both stages, i.e. at the time of listing of shares and thereafter on a continuous basis. The paper sets out the history of public float requirements in India and also succinctly lays down the policy rationale for these requirements (these are not being reproduced here, and interested readers may follow the aforesaid link to the document to obtain a better understanding).
The crux of the changes proposed is as follows, as quoted from the discussion paper:
“(a) The standards for initial listing and continued listing may be prescribed in the SCR Rules.
(b) The standards for initial and continuous listing may be uniform, as the objective is same.
(c) The public offer envisaged at initial listing is of no consequence unless the public are actually allotted shares. The SCRR may speak in terms of allotment to public, not just public offer.
(d) As of now, the word ‘public’ is not defined. If ‘public’ means ‘non-promoters’ and includes FIs, FIIs, MFs, employees, NRIs/OCBs, private corporate bodies, etc., the floating stock would be insignificant. A view needs to be taken on this.
(e) For a company to be listed and continue to be listed, it must have a public stake of 25%.
(f) If for any reason, the public holding reduces below 25%, the promoters, management and company may be jointly and severally be liable to bring the public holding to 25% within 3 months, in the manner prescribed by SEBI, failing which appropriate enforcement action, including delisting, may be taken.
(g) There should not be any discrimination between a Government company and non-Government company. The powers of the stock exchange to relax any of the conditions of listing with the prior approval of SEBI in respect of a Government company needs to be withdrawn. Similarly, the powers of SEBI to relax listing requirements may be withdrawn.”
Apart from establishing a uniform limit of 25%, the proposal addresses other important issues, such as the relevance of actual “allotment” of shares to the public to the extent of 25% and not mere “offer”, the removal of discretion from regulatory authorities like SEBI to relax requirements, introducing a definition of “public” which is currently non-existent and the withdrawal of exemptions available to government companies.
While this is an important step, issues still remain as to how effective this change would be. One crucial factor would be whether the uniform requirement of 25% public holding will apply to existing companies (in addition to new offerings). In that case, several companies (including those that made offerings of large sizes over the last 8 to 10 years) that have a current public float of only 10% (but less than 25%) will have to increase their public float to 25%. This would perceptibly amount to a large exercise and it is not entirely clear if the market will be in a position to absorb either further equity offerings by so many of these companies or sales by promoters to the public so as to hike up the public float to 25%.
On the other hand, if existing companies are to be spared this new change, then this proposal has only minimal impact, as these companies will continue to be governed by their previous public float requirements of 10% (to be reckoned on a continuous basis). Then the new rule will fail in its purpose in obliterating differences in public float limits.
There seems to be a need for a delicate line to be drawn at a policy level. Comments are invited by the Finance Ministry on this proposal by February 28, 2008.