Need For A Cautious Approach - Minimum Public Shareholding

Ali On Content / 21 Jun 2010

The government’s notification stating that the threshold level of public holding in all the listed companies should be a minimum of 25 per cent and that any company that doesn’t have this minimum public shareholding has to catch up to that level by offloading not less than 5 per cent to the public every year has got the markets in a tizzy

“A whole lot of money is now going to mutual funds or other investment avenues. So there wouldn’t be a problem of liquidity while implementing the new amendment to increase the threshold limit of minimum public shareholding to 25 per cent in a listed company. Actually the markets will find their own way of balancing how and where the money will go. Let us not keep on splitting hairs about what will happen and how it will happen. As far as the timing of this amendment is concerned, somewhere you have to bite the bullet. Any time is as good a time as any other time.”

This is what Usha Narayanan, Executive Director of SEBI, has to say when asked about the sanctity of the timing of this amendment. These comments do away with all those doubts about the government and SEBI’s intent to implement the new legislation. So the long and short of it is that it would certainly be implemented, may be with some changes in it. Actually this whole debate was kicked off by a notification issued by the Ministry of Finance on June 4th. Under the Securities Contracts (Regulation) (Amendment) Rules, 2010 the requirements to be satisfied by companies for the purpose of getting their securities listed on the stock exchange have clearly been laid out. This is in line with the Finance Minister’s 2009-10 budget speech proposals for raising public shareholding in the listed companies.

As per this amendment, the threshold level of public holding in all the listed companies has been jacked up to a minimum of 25 per cent and any company that doesn’t have this minimum public shareholding has to catch up to that level by offloading not less than 5 per cent to the public every year till the stipulated level is reached. This notification has jolted the market participants since it clearly indicates the likelihood of a flurry of FPOs of the companies in the next three to four years which will put extra pressure on the already strained liquidity situation. However, market participants do differ on the repercussions this might have on the primary market.

“In the first year itself i.e. in 2010-11 we need around Rs 40,000 crore for PSUs and another Rs 40,000 crore for private peers for their FPOs. Now I think there is enough money in the market as the India story is quite robust and so if any company has a good business model, there wouldn’t be any problem for it to raise money either via FPO or IPO,” reasons Madhabi Puri Buch, MD and CEO, ICICI Securities. Whatever be the case, we have to keep this in mind that for some time now the availability of equity money has not been that easy and companies have to plough hard to woo the investors, which puts undue pressure on the share price and valuation of the companies.[PAGE BREAK]

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A Huge Sum Indeed!
Given the situation, the issue of FPOs is a certainty and the coming four to five years will see a huge wave of them crashing into the markets. “Currently there are 183 companies listed on the stock exchange whose public shareholding is less than 25 per cent and as per the notification they can opt for FPOs, QIP and open market stake sale. At the current valuation these companies would need around Rs 1,50,000 crore out of which 83 per cent or Rs 1,24,000 crore is slated to be raised by 35 PSUs over the next three to four years,” says Jagannadham Thunuguntla, Equity Head, SMC Capitals.

This huge sum would be required in trenches as per the norm of a minimum of 5 per cent of offloading per year and therefore there will be a call for Rs 60,000 to Rs 80,000 crore in the first year itself. It would be interesting to see how this happens. Here, let us reiterate the fact that 2007 was considered as one of the best years in the corporate history of the primary market on the basis of money raised. However, the money raised was only Rs 38,000 crore and so one wonders how such a huge sum will be raised now.

Not an easy task by any standard.
Also we have to keep those small companies in mind who were eying the primary markets from the IPO perspective. Certainly it would become more than just difficult for them to raise this money from the market in the wake of the expected flood of FPOs from big giants like DLF, Wipro, Reliance Power, Blue Dart, Omaxe, Gokaldas Exports, Godrej Properties, Jaypee Infratech etc who will rush to satisfy this new norm. This is apart from the PSUs’ IPOs and FPOs which are about to arrive in due course of time.

But this is not to say that the experts are getting jittery. “In such a scenario the valuation of the issue should be done by keeping a safety net for the markets and investors. As far as the question of raising around USD 20 billion is concerned, it is very small in comparison to more than the value of the economy which is about USD 1-3 trillion. So if the valuations of issues are right the money being raised can be multiplied thrice over,” Buch explains. “We have to keep this in mind that global liquidity is at an all-time high and interest rates are at an all-time low. India today is at the most attractive level ever and so I don’t see any kind of liquidity shortage. We are now raising funds of about 1 per cent of our GDP but fundamentally we can easily double that number,” Buch adds.[PAGE BREAK]
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Enough Teething Troubles
Though the government has notified the amendment, yet it knows very well that this is not going to be very easy to operationalise, keeping in view the fact that the issue is quite complex. “If there is need for any modification, correction, amendment, or may be amplification, it will be done,” is what Ashok Chawla, Finance Secretary, Government of India, has to say. In fact, the Ministry of Finance, along with the Department of Disinvestment, is in talks with companies, including PSUs, to understand the problem they are facing to adhere to the norms of this amendment.

Further, there is not enough clarity about the penal action a company will have to face if it doesn’t adhere to the new norm. Though Chawla told the media that the maximum penalty would certainly be delisting, he made it clear that it would not be carried out “automatically”. It itself this leaves enough space for ambiguity as there may be various reasons by which a company may fail to adhere to this 25 per cent public shareholding norm.

What, for example, will happen if in spite of any follow-up offer a company fails to offload the stipulated 5 per cent shareholding in any year due to poor response from the investors?

“The answer to this is not very simple. In such a case the company would have to make another offer at a much lower price. Actually then there will be huge pressure on the company to regularise this situation just like any other stipulation such as that of an independent director or so on. The issue about the penal action remains unclear as of now but in my opinion it would be equivalent to any other listing condition,” Buch points out.

Experts are of the view that it is very difficult for a company just to waive off this condition by offering a follow-up issue at a much higher price and then by showing to the regulator its failure to offload the requisite 5 per cent shareholding. The suggestion is that the government should allow for some leniency and dilute it to 2.5 per cent instead of 5 per cent per annum.

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