Earlier, on June 4, 2010, the Ministry of Finance introduced a requirement that all listed companies must have a public shareholding of 25%. This was to bring about uniformity and create a level playing field for all listed companies, and was the result of detailed deliberations that spanned several years. Although the rule was met with consternation by industry due to the ensuing possibility of a liquidity overkill, the laudable objectives of uniformity and level playing field appear to have been diluted within a matter of only two months as the Ministry announced two relaxations to these free float norms.
First, the 25% public shareholding may be achieved over a three year time period, without requiring an annual addition of 5% public holding.
Second, and more significantly, the public shareholding requirement for public sector enterprises (PSEs) has been dropped from 25% to 10%. PSEs are said to deserve such relaxations as they generally tend to have large equity bases and may turn out to be the largest victims of the 25% rule. However, it is not clear why the relaxation has been made available only to PSEs and not to other companies that may have larger equity bases. As an editorial in the Hindu Business Line observes:
It is never a good idea for the regulator to also be a participant. The government’s latest flip-flop over public shareholding norms for listed companies shows why. … The reversal appears to be a reaction to feedback received from PSUs that the norm will lead to a spate of follow-on public offers (FPOs) affecting valuations. Maybe yes, but the listed private companies expressed the same fear and that is precisely why the government has relaxed the norms for them now by dropping the mandatory 5 per cent minimum annual dilution. There is no reason why this relaxation should not be extended to PSUs as well while retaining the minimum public shareholding at 25 per cent. The original basis for this rule was that common investors should benefit from the growth of these companies. What happened to that lofty ideal now? Besides, a higher public holding was also supposed to prevent price manipulation.
Prithvi Haldea highlights similar issues and more in this CNBC interview.
Not only does this raise the risk of opening the floodgates to more exemptions and relaxations thereby defeating the purpose of a uniform 25%, but it also points to a larger signaling problem. Whenever it comes to implementation of norms pertaining to corporate law or corporate governance, it is the public sector that seeks more beneficial treatment from compliance with various norms, which then makes the task of ensuring private sector compliance more onerous (at least morally).