Home > 25% Public Holding, Capital Markets > Listed Companies to have min 25% public holding

Listed Companies to have min 25% public holding

This news has created a lot of debate as to if such a rule is really beneficial or not for the markets as well as investors. Let us consider some Pros and Cons about the issue. Here are some links about the government decision.

http://www.dnaindia.com/money/report_companies-must-have-25pct-public-holding_1392111

http://www.thehindubusinessline.com/2010/06/05/stories/2010060552730100.htm

http://www.livemint.com/2010/06/04182944/25-public-shareholding-in-lis.html

Pros:- The obvious advantage of have a 25% public holding means that there will be more liquidity meaning fairer prices. There are several companies with very little free float making price manipulation easy. Surprisingly big PSU’s like NMDC, Hindustan Copper, MMTC figure amongst stocks with less than 2-3% public holding.

In the absence of liquidity stocks can stay over-valued for long periods of time. This rule is expected to ensure fairer prices. Apart from that in the wake of the Satyam scandal, there is a belief that a higher public holding may improve governance standards. This can be debated upon as a common investor relies on annual reports and other quarterly filings to judge company performance. If the auditor is hand-in-glove with the promoter, then there is always scope for cooking the books.

The rule states that the companies can achieve the goal over 3 years with a min of 5% dilution each year allowing companies to have enough time to comply with the rule.

Cons:- As per Crisil and various other sources, the existing listed companies will need to raise anywhere between 1.5 lac Cr ($30 Bn) to 2 lac Cr ($40 Bn) to comply with this rule. So there will be a huge $ 30-40 Bn worth of paper coming into the market over the next 3 years. On an average, equity fund raising has been in the range of $10-$12 Bn each year. The question here is if the markets can absorb so much amount of paper in the next few years?

There are some good companies (PSU’s, Wipro, DLF etc) who will be raising money and it remains to be seen if these issues cause a crowding out effect for smaller firms who are planning to tap the markets in the coming years. We have many companies who have filed their DRHP with SEBI and have got clearance but are waiting for markets to stabilize. A flurry of FPO’s may cause their plans to derail. Good companies needing growth capital may lose out in such a scenario.

One main drawback here is that there are several listed MNC’s in India who may prefer to delist rather than go for the 25% public holding rule. In such a scenario, the Indian investor is losing out by not being able to buy quality stocks like Gilette, 3M, Nestle, Colgate etc (This list is only indicative). This also may not be a good thing for the Indian Investor.

Business Line has a nice chart on which companies would be lining up for issuances in the coming months…

One thing that strikes me here is that PSU’s would easily account for over 1Lac Cr of insurances to meet the norms. This makes me uncomfortable as this gives the UPA-2 (Known for their populist gimmicks) a nice way to trim the fiscal deficit or worse, squander away the money from public issuance’s for some more wasteful schemes. Hope they use this chance to bring the fiscal deficit into order.

Conclusion:- The rule has some good points in terms of better fairer pricing and reduced chances of price rigging. But we have already seen investor response to IPO’s being average to poor in the last 6 months. To match the supply of IPO, FPO, Rights Issues & QIP paper, there has to be strong investor demand. Increased fears of a debt crisis could cause capital inflows to slow down in the wake of increased risk-aversion. Already MF’s have seen their AUM shrink by 16% in the last month owing to advance tax payments, 3G payments etc.

On a more positive note, even though several listed MNC’s may choose to delist (here) we had the Standard Chartered IDR aimed at giving the company visibility in India. It is likely that since India will grow better than the developed world, many foreign companies who find India to be a key market may choose to remain listed in India or list via the IDR route.

Who knows, if the India growth story is really as solid as the Goldman Sachs BRICS report, our children may be buying GE, Intel and Microsoft in their portfolios just like our generation bought Nestle, Colgate and Honeywell. That is a future worth hoping for.

  1. April 9, 2013 at 7:13 pm

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