Public shareholding move spooks market
Sock markets received a rude jolt on Friday when finance minister Nirmala Sitharaman announced that listed companies would have to maintain a minimum public shareholding (MPS) of 35%, against the current 25%.
There were some more setbacks in store — the tax announcements such as a surcharge on earnings of high net worth individuals , or HNIs, and disincentives for share buy-backs by companies.
The BSE’s benchmark Sensex sank to 39,513.39 points, down 394.67,or 0.99%. The National Stock Exchange’s Nifty closed at 11,811.15, down 135.60 points, or 1.14%. The BSE MidCap and Small Cap indices were down over 1% each.
Proposals to exempt options trading from the securities transaction tax (STT), removal of short-term capital gains (STCG) for fund of fund of Central Public Sector Enterprises (CPSE) and relaxation of the norms for offshore funds lacked the ballast to offset the disappointments.
Currently,, listed companies have to restrict promoter shareholding at 75%; this will change to 65%. This will force at least 167 companies from BSE’s Top 500 to come out with public offers. Of the total universe of listed firms on BSE, 835 firms have promoter holding in excess 65%. “It is right time to consider increasing minimum public shareholding in the listed companies. I have asked Sebi [Securities and Exchange Board of India] to consider raising the current threshold of 25% to 35%,” Sitharaman said in her maiden budget speech.
There was some relief for state-owned companies listed on the stock exchanges. Sitharaman assured them that they can maintain a public float of 25%. In fact, 60 public sector units are yet to maintain the public float threshold. Listed companies were required to have a minimum public shareholding for the first time in 2013 when the threshold was raised from 10% to 25%. Sebi had created two additional avenues for raising public shareholding--offer for sale and institutional placement. It was a major challenge for listed firms and Sebi had penalised over 100 companies for not adhering to the 25% stipulation. Public sector undertakings were given a deadline of August 2017, which was further extended to 2018, to have a 25% minimum public float.
While Sitharaman’s move is bound to bring more investors to the equity markets, it will also force corporate entities to go on a public offering spree. This would also require the market regulator to change norms pertaining to public offerings. In the coming months, Sebi will also need to specify the timelines companies need to meet.
Experts say Indian companies would need at least 3-5 years to meet the new promoter holding thresholds. “For those companies intending to raise the level of minimum public shareholding, I hope such firms are granted sufficient time of, say, at least three years to dilute the promoter shareholding,” said Yogesh Chande, partner at law firm Shardul Amarchand Managaldas.