New Delhi / Mumbai: The government on Friday notified rules asking all listed companies to ensure minimum public shareholding of 25% to increase opportunities available to investors to benefit from economic growth and its impact on firms.
The new rules, which followed a two-year process, could see companies such as Reliance Power Ltd, Wipro Ltd and NTPC Ltd hit the primary market within the next 12 months.
Graphic: Yogesh Kumar / Mint
According to a report by rating firm Crisil Ltd, there are 179 companies that have a public shareholding of less than 25%. At end-May prices, this would mean that these companies need to dilute stakes worth Rs1.6 trillion, the research firm has calculated.
The new rules said companies could meet the 25% norm in phases. At the least they would have to add 5% every year to public holdings till it reaches 25%.
“The clock starts ticking now,” said a finance ministry official, who did not want to be named. This would mean the annual time slots to meet minimum public holding norms would start from 4 June, he added.
In that case, the markets could see fresh paper supply over the next 12 months to the tune of Rs58,528 crore, just from BSE-500 firms, which make up some 90% of India’s total market capitalization.
Marketmen believe that firms should not have any problems in raising this money if the pricing is right. An increase in the public holding of stocks typically increases liquidity and helps in better price discovery.
“The government has a golden opportunity to create an equity revolution of sorts as it can bring a lot of good companies to the market,” said Raamdeo Agrawal, managing director of Motilal Oswal Financial Services Ltd. “But if they price it high like in some of the recent issues like NTPC and NMDC (Ltd), then it may put off investors and such issues benefit nobody.”
Uniform listing requirements for all companies, including state-owned ones, could trigger a lot of activity in the primary market. In the current fiscal, the Union Budget estimated that Rs40,000 crore would be raised through disinvestment. Friday’s announcement might see that figure being eclipsed.
However, some firms may prefer to get delisted.
“There may be many companies that currently have, say, a 10% public shareholding. If these companies choose to get delisted rather than increasing their public shareholding further, the government should also specify the guidelines for delisting under such circumstances,” said Pradeep Dokania, head of global wealth management at DSP Merrill Lynch Ltd.
The norms for minimum public shareholding would have to be followed when a company first lists its shares and have to be maintained as long as it’s listed.
For a new listing, if post-issue capital of the firm when calculated at the offer price is more than Rs4,000 crore, it has the option to restrict public shareholding to 10% during the issue. Subsequently, the company would have to add public shareholding of at least 5% a year till it reaches 25%.
In the event that public shareholding of a listed company falls below 25%, it needs to restore this to the minimum level within a year.
Listing norms have been calibrated over the years to achieve the aims of the government of the day. Two decades ago, companies had to offer 60% of their issued capital to get listed on a stock exchange. In September 1993, this was reduced to 25% to encourage more companies to list during the early days of full-fledged economic liberalization.
With Friday’s notification of the Securities Contracts (Regulation) (Amendment) Rules, 2010, at least three private sector firms that had initial public offerings last fiscal have to hit the market again this year.
Mahindra Holidays and Resorts India Ltd, DB Corp Ltd and Godrej Properties Ltd all have promoter holdings of 80% or more and will have to go to the market again before March 2011.
“The move is positive for the markets, even though many PSUs (public sector units), which floated public issues in 2009-10, would have to hit the capital markets again this year. I think there is enough appetite in the market to absorb these papers,” said Rajagopal A., managing director (investment banking) at UBS Securities India Pvt. Ltd.
Public sector firms that have already raised money such as NHPC Ltd, Oil India Ltd, NTPC and NMDC will also fight for capital with their public sector peers who are already on the divestment list this year.
Real estate firms dominated the list of companies that need to dilute, with the bigger ones such as Puravankara Projects Ltd, Omaxe Ltd and DLF Ltd looking to sell shares.
Ashwin Ramarathinam in Mumbai also contributed to this story.