Norms on Minimum Public Float Set to Become Reality

In a post over a year ago, we had discussed that several companies were listed with differing minimum public shareholding in the past due to varying rules regarding minimum public float. These discrepancies continue to date. In order to obviate them, the Ministry of Finance had proposed imposing a uniform public float of 25%. This was also alluded to in the Budget this year.

The Economic Times reports that this proposal has received the assent from the Finance Minister and is expected to take effect soon. It states:

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.

This may help set right some of the past discrepancies in listing requirements, particularly because several leading listed companies in India still have promoters (or controlling shareholders) holding a substantial stake thereby having complete control over such companies. Not only does this provide limited liquidity to public shareholders, but it also reduces the ability of minority shareholders to exercise meaningful rights in these companies. As the Economic Times notes:

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.

However, there are bound to be difficulties in implementation as it is not clear if the markets have the wherewithal to absorb such large-scale public offerings within a limited period of time. As regards companies themselves, they would have concerns regarding valuation given the current state of the financial markets, and may not wish to dilute at sub-par valuations.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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