Kolkata/Mumbai: In a significant move that would quell concerns of the market being hit by a flood of share sales by large public sector undertakings (PSUs), the Union government plans to exempt the state-owned firms from the 25% public shareholding norm.
At a recent meeting on the imminent initial public offering of Coal India Ltd (CIL), finance minister Pranab Mukherjee said large PSUs will not be required to adhere to the norm at least until 2014, according to two government officials familiar with the development.
On 4 June, the government amended the Securities Contract (Regulations) Act rules by ordering all listed companies to lower their promoter holdings in a phased manner until a minimum of 25% stake is held by to the public. The objective was to enhance opportunities for common investors to benefit from India’s economic growth and promote better price discovery.
Under the norms, all listed companies need to dilute at least 5% every year until public holding in them reaches 25%.
For a new listing, if post-issue capital is at least Rs4,000 crore at the offer price, a firm 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% every year.
CIL, Hindustan Copper Ltd, Steel Authority of India Ltd, MMTC Ltd and Power Grid Corp. of India Ltd are planning public issues during the year as part of the government’s asset divestment programme.
The government intends to raise at least Rs40,000 crore through divestment this year. So far, it has raised close to Rs2,000 crore by selling stakes in SJVN Ltd and Engineers India Ltd.
One of the officials cited above said CIL and Hindustan Copper are likely to be exempted from complying with the 25% minimum public shareholding norm.
“The government is likely to allow companies such as Coal India and Hindustan Copper to remain listed with only 10% public holding. Private companies that are not able to comply would have to buy out minority shareholders and delist,” said the official who didn’t want to be named.
CIL, set for the largest public offering ever by an Indian company, is expected to file its draft red herring prospectus with the Securities and Exchange Board of India (Sebi), the capital market regulator, on Monday. The company is expected to mention under the risk factors in the prospectus that it may not be able to comply with the 25% minimum free float norm, according to investment bankers who did not want to be named.
At a recent meeting with CIL’s trade unions, Mukherjee said the government wouldn’t sell any more shares in the firm until 2014, according to the firm’s employees and trade union leaders who attended the meeting.
“He (Mukherjee) assured us at that meeting that as long as the UPA (United Progressive Alliance) was in power, it wouldn’t go beyond 10% disinvestment,” said M.K. Pandhe, a politburo member of the Communist Party of India (Marxist) and general secretary of its labour arm Centre for Indian Trade Unions (Citu).
Mint could not reach out to Mukherjee’s office over the weekend.
Asked about the development, disinvestment secretary Sumit Bose said he was not aware of the government’s plan to exempt PSUs from the public shareholding norm.
Citu still opposes disinvestment because “once it starts it goes on step by step”, according to Pandhe. “I reminded him (Mukherjee) that Indira Gandhi (then prime minister) had at the time of nationalization of Coal India in 1973 told the nation from the floor of Parliament that the company would not be disinvested,” Pandhe added. “He (Mukherjee) didn’t reply.”
At present, most firms dilute just 10% stake and their shares tend to trade at a premium.
“If the public shareholding in a listed company falls below 25% at any time, such companies shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall,” the finance ministry said on 4 June.
Market experts have been concerned that the decision could flood the capital markets with public share offer.
According to a recent research report by rating agency Crisil Ltd, at least 179 listed companies have less than 25% public holding. Of the total of 247 Central Public Sector Enterprises (CPSEs) and subsidiaries of CPSEs, only 47 are listed and 45 of these constitute 24% of the total market capitalisation of 4,898 companies listed on the Bombay Stock Exchange (BSE).
In addition, 27 public sector banks, along with their subsidiaries and six state-level public enterprises, account for 6% of the total market capitalization of BSE.
All PSUs collectively account for 30.7% of the total market capitalization of BSE or Rs18.64 trillion, according to www.bsepsu.com, a website dedicated to government-owned listed firms.
The market capitalization of state-owned firms may drop substantially following the requirement to lift public shareholding in all listed firms to 25%, experts have said.