Mumbai: If the government decides to go ahead with a finance ministry proposal for a minimum 25% public shareholding in all listed Indian firms, at least Rs1.19 trillion worth of fresh shares will flood the market, based on the top 500 companies alone.
A Mint analysis of the BSE 500, the top 500 firms on the Bombay Stock Exchange (BSE), reveals that at least 42 firms will have to lower their promoters’ stake to comply with the norm, and the size of their floats could be between 1% and 24.33% of their equities.
CAPITAL INFUSION (Graphic)
Based on the market value of these stocks at Friday’s closing price on the Bombay Stock Exchange, the collective value of their floats could be Rs1.19 trillion. India’s top 500 firms in terms?of market?value?comprise the BSE 500 index that accounts for 90% of the value of all stocks trading on bourses.
The ministry has proposed to raise the public shareholding limit to 25% from the current 10% to increase investor participation in the market.
People monitor market news outside the BSE building in Mumbai. A Mint analysis shows at least 42 of the top 500 firms will have to lower their promoters’ stake to comply with the proposed norms. (Adeel Halim / Bloomberg)
“A large number of shares distributed among a large number of shareholders is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices,” the discussion paper of the ministry says.
Industry participants believe this move by the government could broaden the equity markets. “If the finance ministry’s proposal becomes a law, it will be a great step to broad-base the equity market,” says Vikas Khemani, senior vice-president of the publicly traded institutional brokerage Edelweiss Capital Ltd.
Kaushal Sampat, chief operating officer of Dun and Bradstreet Information Services India Pvt. Ltd, also says pushing up public holdings in listed entities will provide adequate float in the market.
In addition to that, more stocks will also “rationalize” the valuations of Indian equities. “If the demand remains constant but the supply increases, we will see a change in pricing of stocks. It will be more realistic,” says the company secretary of a corporate house in Mumbai, adding, “New stocks will also dampen the volatility in the market.” Analysts, however, feel such firms should be given enough time for their public floats in line with the market’s appetite.
Among the top 5 listed Indian firms with the least public holdings, four are public sector undertakings: MMTC Ltd, NTPC Ltd, Steel Authority of India Ltd and Power Grid Corp. of India Ltd. The only private entity IN the top 5 is India’s largest listed realtor, DLF Ltd.
Currently, MMTC is 99.3% state-owned and the government holding in the other three companies varies between 85.81% and 89.41%. The promoter holding in DLF is 88.16%.
Some industry participants feel this is a way of unlocking value in some large state-owned companies. “The government stands to gain the most from such a move,” says B. Narasimham, vice-president of Karvy Compushare Pvt. Ltd, the largest registrar of primary market issues in India. “This will allow the market to value companies fairly. In many cases, valuations are too high because of limited float. Also, with increasing institutional participation, both domestic and foreign, the available number of shares for active trading is coming down.”
However, the increase in “public shareholding” does not necessarily mean that institutional shareholding will go down as public shareholding, which loosely refers to stakes held by non-promoters, includes holdings by foreign and domestic institutions, mutual funds, employees as well as private corporate bodies, besides the public. The ministry’s discussion paper has emphasized on the need for a fresh definition of public ownership.
Many analysts say most of the companies may opt for private placement of shares to an institutional investor to bring down the promoters’ stake instead of entering the capital market with public floats.
The discussion paper notes that the market regulator, the Securities and Exchange Board of India, should be entitled to take enforcement action including delisting of a company’s shares from the stock exchanges if it fails to comply with the new rule, for which the ministry has invited comments by 28 February.
However, not everyone is convinced about the feasibility of the new norms. A senior executive from a large foreign investment bank in India who does not wish to be named says: “One should also ask the question whether all these companies or their promoters need additional money at this point. The government’s intention to widen the market is good. However, this will affect all the shareholders of the company. Investors will raise questions about stock dilution, which will destroy the value of their shares.”
The promoters can bring down their holdings in two ways—by selling their stakes and by expanding the equity base and issuing fresh shares. The expansion of equity base affects shareholders’ interest as earnings per share goes down following the increase in number of shares.
“The sudden and large increase in the volume of public offers in India will put to test the adequacy of domestic primary market infrastructure,” notes Akhil Hirani, managing partner of Mumbai-based corporate law company Majmudar and Co.
According to New Delhi-based primary market data provider Prime Database, more than Rs75,000 crore worth of public offerings are expected this year in the normal course. In January, the Rs11,700 crore Reliance Power Ltd was subscribed 73 times and the Rs 490 crore Future Capital Holdings Ltd was subscribed 133 times, showing huge investor appetite for new stocks. More than 100 initial public offerings hit the market last year.
Ashwin Ramarathinam contributed to this story.