Mumbai / Delhi: In a move that could bring relief to listed public sector units (PSUs), the government has diluted norms that had stipulated a minimum 25% public shareholding in PSUs, easing concerns about a flood of share sales that could have eroded the market value of these firms.
The Centre allowed PSUs to keep their public holding at 10% and exempted all listed firms from the mandate of divesting at least 5% a year to increase the public shareholding to 25%. Mint reported on Monday about the relaxation for state-owned firms.
The government had on 4 June amended the Securities Contract (Regulations) Act rules by making it compulsory for all listed entities to lower their promoter holdings in a phased manner until a minimum of 25% was held by the public. The objective was to allow common investors to benefit from growth and promote fair price discovery. The June norms mandated all listed firms to dilute at least 5% every year until the public holding reaches 25%.
A notification issued on Monday diluted the minimum holding for PSUs and ironed out areas where the 4 June order on public shareholdings in listed firms was inconsistent with other regulations.
PSUs, as was the case before the 4 June order, will be subject to a separate set of rules on listing. Monday’s notification was the outcome of the “political economy of policymaking”, said a senior finance ministry official, who did not want to be named.
According to the notification, PSUs will have to maintain minimum listing norms of 10% against 25% needed for private firms. Private listed firms, however, can dilute less than the minimum required (5%) for public and meet the minimum norms over a three-year period beginning 9 August. The listed PSUs with less than 10% public shareholding too will get three years to achieve the 10% public shareholding mark.
Ahmed Raza Khan / Mint
Monday’s minimum listing order retained one aspect of the 4 June order. In the event a listed firm’s public shareholding falls below the minimum requirement in future, it would have to increase the level of public shareholding to meet the norms “within a period of 12 months from the date of such reduction”.
Soon after the 4 June order, both PSUs and private firms began to lobby the government to relax the norms. “If there is need for correction or amplification, it will be done,” Ashok Chawla, finance secretary, had said (Mint, 10 June).
For some private firms, the 4 June order was inconsistent with the provisions of Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009, a Securities and Exchange Board of India rule. Regulation 37 of ICDR prevents firms from selling shares within a year of having raised money from the market. This would have hit firms such as DB Corp. Ltd and Godrej Properties Ltd, which had listed a little before the 4 June order.
“With the new order, the companies will be allowed to sell as much share as they want during a year. They can even skip a year and sell 10% in the succeeding year, or just sell 2% in one year and divest 8% in the next year and likewise,” said another finance ministry official on condition of anonymity.
The government’s move will alleviate concerns of the market being hit by a flood of share sales by large PSUs as many market experts have been cautioning that there may not be sufficient appetite to absorb them, leading to the possible failure of some of the larger divestments.
“PSUs will get a better valuation,” said Nagendra Bhatnagar, managing director and chief executive officer of IDBI Capital Market Services Ltd. “Also, since PSUs formed the major part of the companies that had low promoter holding, the earlier (rules) would have brought in lot of fresh paper and put pressure on the market. Now, that is also taken care of.”
The move followed a recent meeting on the forthcoming initial public offering of Coal India Ltd (CIL), where finance minister Pranab Mukherjee said PSUs will not be required to adhere to the norm at least until 2014, according to two government officials familiar with the development.
While CIL filed its draft red herring prospectus on Monday, Hindustan Copper Ltd, Steel Authority of India Ltd (SAIL), MMTC Ltd and Power Grid Corp. of India Ltd (PowerGrid) are planning public issues during the year as part of the Centre’s asset-divestment programme.
The government intends to raise at least Rs40,000 crore through divestments this year. So far, it has raised close to Rs2,000 crore by selling stakes in SJVN Ltd and Engineers India Ltd. At present, most firms dilute a 10% stake and their shares tend to trade at a premium.
“The avalanche of issues would have put pressure on both primary and secondary markets,” said an official at a large broking and research firm.
According to a study by SMC Capitals Ltd, before this amendment, there were 35 PSUs that would have been affected by the said “minimum public shareholding” norms. The total amount expected to be raised by them was around Rs1.25 trillion.
After the amendment, 20 PSUs will get a relaxation, and 15 will need to sell shares. Those getting a relaxation include SJVNL, SAIL, PowerGrid, Power Finance Corp. Ltd, Mangalore Refinery and Petrochemicals Ltd, National Aluminium Co. Ltd, NHPC Ltd, NTPC Ltd, United Bank of India, Central Bank of India, Shipping Corp. of India Ltd, Indian Bank, Indian Oil Corp. Ltd, Dredging Corp. of India Ltd, Oil India Ltd, Bank of Maharashtra and Bharat Electronics Ltd.
The total amount that now needs to get raised by the 15 PSUs put together is Rs20,000 crore. All PSUs collectively account for nearly 30% of the total market cap of the Bombay Stock Exchange, or at least Rs19.51 trillion (as of Monday’s close).