The Cabinet decision to raise the bar on floating stock in order that companies remain listed on stock exchanges has its obvious pluses. Deeper markets lead to better price discovery, are less prone to manipulation and further the cause of shareholder capitalism. The UPA’s decision to up the public float threshold to 25 per cent nests a core divestment strategy within broader market reforms. Crisil Equities, a rating agency for initial public offers, reckons 179 companies, most of them state-owned, will have to issue stock worth Rs 160,000 crore to remain listed. The lion’s share of this money will go towards bridging the yawning fiscal deficit till such time as tax revenue growth regains its pre-crisis trend. In the bargain, the UPA will be reversing the relaxation of public float regulations that had crept in over the last decade as the information technology and infrastructure fads gripped the Indian capital markets and raised company valuations to unrealistic levels.
The move will have far-reaching consequences for India Inc. Blue chips like DLF, Reliance Power and Wipro will have to spread more cheer. Multinationals wary of parting with their gains to Indians will have to decide whether local listing is worth the effort of doing business in the country. But by far the biggest beneficiaries of the higher float requirement will be public sector enterprises. State-owned enterprises stand to gain from even minority stake sales. Listing requires quarterly disclosure, a more accountable way of doing business than the annual statements presented by these companies to their single shareholder. The tighter scrutiny of market players, both local and global, imposes a higher discipline in boardrooms and makes political interference a shade less pervasive.
The need for a robust stock market cannot be overemphasised. India’s principal gateway to global capital markets is its bourse. A capital scarce economy — we save less than we invest and import more than we export — must ensure this portal is friction free. The gains are not merely in the form of higher investments, although that in itself is quite substantial. Local corporate governance has to ramp up to the more stringent requirements of the international investing community. Indian infotech companies have imported western boardroom behaviour in the main because they are listed on foreign bourses as well. Their brick-and-mortar cousins, too, stand to benefit from increased shareholder activism.