Finance minister Nirmala Sitharaman stumped the stock markets when she announced that it is the right time to consider increasing minimum public shareholding in listed companies. "I asked Sebi to consider raising the current threshold of 25% to 35%." Her statement made corporate CEOs, analysts, investment banks, brokers and investors start calculating how listed companies will be impacted. From the FM's point of view, raising the current threshold of public shareholding in listed firms is a good one. But, if the compliance window for the soon-to-be-announced norms is small, listed companies may lose more than they gain.
Every Fourth listed company in spotlight
Indian listed companies are often excluded from global indices, because of low-float i.e. a low number of shares actually available for trading. Since promoters and promoter families own a large portion of company's shares, the actual number of shares available for trading becomes low. From that angle, raising public shareholding in Indian listed firms will increase the supply of shares available for trading and thus attract more foreign investors into such stocks when the global indices start including Indian companies. For the promoters of companies, both Indian and arms of MNCs, the public shareholding move is a double-edged sword. The FM asked the market regulator to consider raising the limit from 25% to 35%. This means 10% more float will have to be available. More than 1,100 listed firms have promoter shareholding above 65% and this means all of them will be theoretically required to cut promoter stakes so that public shareholding norms are met. Thus, this move alone affects one out of every fourth listed company in India. Sebi listing norms currently mandate that every listed entity will maintain a minimum public shareholding of 25%, which means promoters can hold 75%.
"The FM announced that SEBI will mull increasing minimum public shareholding from 25% to 35%. Implementation of this idea would require promoters to reduce their stake in a time-bound manner and for this purpose, having a good primary market and a conducive secondary market would be essential," Nitesh Mehta, Partner/ Transaction Tax, Tax & Regulatory Services, BDO India.
Task cut out for promoters
Historically, India has been a promoter-driven market and increasing the threshold will ensure wider ownership through institutional investors, more market depth, better price discovery and hopefully will enhance the corporate governance standards.
"This will potentially also be a concern of several listed companies with promoter shareholding at around 75% e.g. MNCs. Promoters of such companies may want to explore options to delist such companies unless they are fine with increasing the public shareholding by another 10%," says Yogesh Chande, Partner, Shardul Amarchand Mangaldas & Co.
Based on the latest shareholding data available, research shows 1,174 listed companies have promoter shareholding above 65%. To put in other words, 25% of the entire universe of listed companies (4,700 companies) will have to go through off-loading promoter stakes to meet this requirement.
"At the current market prices, the total quantum of sale that needs to be done by these 1,174 companies works out to about whopping amount of Rs 3,87,000 crore," said Centrum Wealth Research. Typically, the Sebi gives companies three years to comply with its public shareholding norms. While Sebi has not yet come out with the revised norms, one can expect draft rules to be announced soon given that the FM has made the announcement on the floor of the House. While experts need to await Sebi regulations regarding how much time will be given to these companies to meet with this minimum public shareholding norms, the overhang of this requirement of off-loading of promoter shareholding can have a significant impact on the markets and the specific stocks. The regulator needs to provide sufficient time to meet this requirement so as not to over-flood the markets with stake sales by promoters.
Usually, going public is not a problem for privately held companies. Going public means doing an IPO. But for listed companies, public issues are different. Let us have a look at top companies that may be impacted by the minimum public shareholding norms.
TCS: The Tata Group's cash-cow has a market value of Rs 8.4 lakh crore. The promoters have a 72.1% shareholding in this IT giant. To comply to the minimum 35% public shareholding norms, the promoters will have to offload 7.1% stake that would fetch them Rs 60,000 crore. But, the promoters do not immediately need this money. TCS generates a lot of cash, but due to public shareholding norms, they would have to sell those shares.
Wipro: The IT giant remains an important stock in the Indian listed companies. Azim Premji and family hold 73.9% stake in Wipro and this could mean a stake reduction of 8.9% worth over Rs 15,000 crore to comply to the minimum proposed 35% public shareholding.
Avenue Supermarts: Avenue Supermarts, owner of D-Mart retail chain, has been a swashbuckling stock for IPO investors. The stock has gained nearly four times since its IPO, but the company promoters hold 81.2% stake, exposing them to the possibility of a 16% stake reduction
worth Rs 14,000 crore.
Bandhan Bank: This company had a dream debut and attracted investor attention since it was the first bank to be set up in eastern part of India after Independence. Its IPO got subscribed 15 times, and investor demand has been good for the stock. The minimum 35% public shareholding norms mean that Bandhan Bank promoters would have to offload 17.3% stake in the company, since they hold 82.3% already.
Other top companies likely to be impacted include the likes of HDFC Life Insurance, IDBI Bank, Coal India, GIC, HUL, HDFC Asset Management, Interglobe, HAL, ICICI Prudential Life Insurance, Bank of India and The New India Assurance. (The author is a journalist with 14 years of experience)