The finance ministry has proposed in a discussion paper that the public must always own at least 25% of a listed company’s shares. If public holding falls below this minimum, promoters and company managements will have to either take corrective action, face regulatory ire or delist.
This seems a good idea, but is it really? Mint estimates that Rs1.2 trillion of new stock could be in the market if the companies that comprise the Bombay Stock Exchange 500 index have to follow this new norm. The finance ministry says that more floating stock will deepen the market and reduce the scope for price manipulation.
London, too, insists on a minimum 25% public holding. Singapore and Hong Kong have similar norms, but both relax them depending on the size of the company. In other words, larger companies are allowed to get away with lower levels of public holding because their size ensures ample floating stock. The US, curiously, asks companies to have a minimum number rather than a percentage of publicly held shares.
Our worry is that the demand for lower promoter holdings could scare off many companies that would otherwise have thought of a listing. This is the reason why the public investment threshold was reduced over the years in India in the first place.
Before 1993, the Securities Contract Regulation Act of 1956 required a company to offer at least 60% of its capital to the public if it wanted a stock market listing, though the rule was riddled with exemptions. This threshold has been reduced over the years for a valid reason: The high public holding limit kept many companies out of the stock market. This eventually reduced investor choice. Now, some companies can get listed by selling just 10% of their capital to public investors.
This is the policy paradox. A low level of public holding could harm investor interest because they do not get access to shares and prices can be manipulated easily. But a higher threshold is likely to keep many companies out of the market and be an obstacle to portfolio diversification.
The finance ministry discussion paper makes no convincing case why we should prefer one to the other.
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