Public Offers made Public - III

After introducing Public Offers in the first part and discussing some regulatory changes in primary markets in the second post, the third post will focus on the pros and cons of the recently proposed 25% listing norms.

On 4^th June 2010, the Ministry of Finance amended the Securities and Contract (Regulation) Rules, 1957 to set a limit of a minimum 25% public shareholding for initial public offers (listings) by companies on Indian stock exchanges as well as for continued listing.

A few salient features of the notification are:

• Existing listed companies having less than 25% public holding have to reach the minimum 25% level by an annual addition of at least 5%.
• For new listing, if the post issue capital of the company calculated at offer price is more than Rs. 4000 crore, the company may be allowed to go public with 10% public shareholding and comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum. 
• For companies whose draft offer document is pending with Securities and Exchange Board of India on or before these amendments are required to comply with 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum, irrespective of the amount of post issue capital of the company calculated at offer price. 
• A company may increase its public shareholding by less than 5% in a year if such increase brings its public shareholding to the level of 25% in that year.
• Every listed company shall maintain public shareholding of at least 25%. If the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall.

According to estimates around 180 listed companies have less than 25% public shareholding and they may have to tap investors for an amount close to Rs. 1.6 lakh Crore according to 31 March,2010 prices or raise Rs. 2.1 lakh Crores through fresh issues (as per Crisil estimates). 82 percent of the estimated funds are likely to be raised by 29 listed government entities in order to adhere to the new norm.

With this announcement it is quite likely that a number of private companies might go for de-listing from the exchange because of high promoter holding and reluctance to dilute their stakes.On the government’s part it is a clear indication of the initiation of the disinvestment process as the majority amount (82%) is being raised by the PSU only.

Rational for the notification

·        Improve liquidity in the stock market by a dispersed shareholding structure

·        Fair price discovery and transparency (corporate governance) in the system for protecting the retail investors from the information asymmetry arising out of very little public holding.

·        Reducing the scope for individual price manipulation (by the promoters) by increasing the shareholder base

The above norms of 25% public shareholding shall have many implications in the Indian equity markets. Some of the difficulties and concerns could be:

• Listed companies would be under pressure to offer securities to comply with the new norms without considering the market conditions, which may in turn impact their valuations. 
• The depth of Indian capital markets to absorb the huge flood of securities is questionable. 
• The success of implementation of the above norms has to be ensured through delisting, fines or penalties in cases of violation. 

(This article has been taken from the report titled “Analysis of Recent Trends in Public Offers in the Indian Context (Legal and Financial aspects)” prepared by Rigved Mitra and Saket Saurabh under the guidance of Prof. V.K.Unni)