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June 7, 2010
Minimum public participation in listed companies increased to 25%
Introduction In a landmark move that could impact the Indian capital markets, the Union Finance Ministry has on June 4, 2010 made it mandatory for all listed companies to raise their public shareholding to 25%. This proposal has been brought into force by way of an amendment to the Securities Contracts (Regulation) Rules, 1957 (“SCRR”). Though there have been discussions in the past to address the issue of minimum public float to be adhered to by the listed companies, the same has not been concluded due to differences that existed between the market regulators, and between Securities and Exchange Board of India (SEBI) and the Finance Ministry. In order to address the said issue, the government had published a discussion paper in February 2008 that had also suggested a minimum 25% public holding limit for listed companies. However, the same was put on hold as a result of the global financial turmoil which majorly impacted the stock markets. It was important to address the aforesaid issue given that a higher stake by the promoters in the listed company would have made the securities susceptible to price manipulation and defeated the prime objective of the Securities Contracts Regulation Act, 1956 (“SCRA”) of preventing undesirable transactions in securities. Similarly, it is imperative to have a higher public float in listed companies to increase the liquidity of the stocks. On the other hand, a very high level of public float would have acted as a disincentive to private enterprises as giving a large share in the capital / control to the public could impact the profitability of the business of the companies. It was a challenge for the regulators to balance the interests of the promoters and of the public in order to ensure that there is no price manipulation. In view of the above, there was a need to resolve the said issue and specify a threshold to be followed by all listed companies. Existing Legal Framework The SCRR prescribes a minimum part of the issue to be offered to the public by the company seeking listing on a recognized stock exchange. As per the provisions of the SCRR, a company seeking listing on a stock exchange is required to offer at least 25% or 10% (subject to certain conditions[1]) of each class or kind of securities to the public for subscription. Further, the listing agreement entered into by the company with the stock exchange requires the company to ensure minimum non-promoter holding on a continuous basis[2]. Hence, according to the current regulatory regime, all the listed companies barring a few (such as government companies) shall maintain a minimum of 10% or 25% of public holding, depending on the nature of their public offer and outstanding listed shares.
Proposed Amendments The proposed amendments seek to implement the following: a) Every listed company needs to comply with the minimum threshold level of public holding of 25% and for a continuous listing it needs to maintain public shareholding of at least 25%. In the event of the public shareholding of such listed company falling below 25% at any point, the company will be required to increase the public shareholding up to 25% within a maximum period of 12 months from the date of such fall in the shareholding. This move seems to make the public float requirements in line with practices followed globally. b) Existing listed companies having less than 25% public holding would have to dilute at least 5% additional equity annually till they reach the threshold limit of 25% public shareholding. However, 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. c) Unlisted firms that go public with a post-issue market capitalization of more than Rs. 40 billion, may go public with a 10% float initially, but will have to have a public float of 25% by increasing its public float by at least 5% a year. This effectively means that for less than the threshold limit of Rs. 40 billion, the above relief of going public with a 10% public float and subsequently increasing it by at least 5% a year will not be available. This would be prejudicial to the small and medium enterprises as they may not be able to have a post-issue market capitalization of more than Rs. 40 billion and hence will be unable to access the market if their public shareholding is less than 25%. d) Companies whose draft offer document is pending with the SEBI must also increase their public shareholding by at least 5% per year, irrespective of the post-issue capital calculated at offer price.
Implications Justifying the statement that a “dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices”, the proposed amendments are a welcome move as this will ensure more public participation and will leave less scope for price manipulation. Further, higher public shareholding will force promoters to be more accountable to the investor community. As per the current regulations, SEBI had the powers to waive or relax the listing requirements under the SCRA and stock exchanges could also relax listing requirements for a government company. This created discrimination between a government and a non-government company. However, with the proposed amendments coming into effect, such powers will no longer be available with SEBI and the stock exchanges. Though there are certain advantages of the proposed amendments, one even need to see the practical implementation of the proposed amendments in light of the fact that currently, there are 29 public sector undertakings and 179 other companies that have public shareholding below 25%. Therefore, all these companies will be required to dilute their promoters’ shareholding through an offer for sale, further public offering, preferential allotment, open market sale etc. This will result in a huge release of shares on the stock exchange. As per a report of CRISIL, it is estimated that these companies may raise around INR 1,600 billion if they opt for sale of shares and INR 2,100 billion if they plan to dilute their stake via issue of fresh shares. Relevant amendments to SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2000 and listing agreement are also expected to be made by SEBI to make the said regulations in line with this recent amendment to SCRR. Alap Yadav & Vaidhyanadhan Iyer
You may direct your comments to Ramya Krishnan-AniL +91 900465 0363 |
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[1] At least 10% of each class or kind of securities to the public for subscription subject to the conditions that:
a) minimum 20 lakh securities are offered to the public,
b) the size of the offer to the public is a minimum of Rs.100 core, and
c) the issue is made only through book building method with allocation of 60% of the size to the qualified institutional buyers.
[2] As per Clause 40(A) 0f the listing agreement:
i. The following companies shall maintain the minimum level of public shareholding at 10%:
a) a company which offers or has in the past offered at the time of initial listing less than 25% but not less than 10% of the total number of issued shares of a class or kind, or
b) a company where the number of outstanding listed shares is two crore or more and the market capitalization of such company in respect of shares of such class or kind is Rs.1000 crore or more.
ii. In all other cases, the company shall maintain public holding of at least 25%.