The government is set to amend rules to ensure that public shareholders own a minimum 25% in all listed companies. While there is a lot of merit in increasing public shareholding, policymakers seem to be missing the larger picture.
According to a discussion paper put out by the finance ministry about two years ago, one benefit of an increase in floating stock is that it will reduce the possibility of manipulating a stock. Besides, the document states that it will prevent the phenomenon of only a few promoters cornering benefits flowing from the policies of the government and public institutions.
It’s incorrect to assume that a 25% float will necessarily curb manipulation. This will depend largely on the market value of a company. Reliance Industries Ltd, with a market capitalization of around Rs3.5 trillion, will have sizeable floating stock worth Rs35,000 crore with a minimum float requirement of just 10%. At the same time, for a stock with a market capitalization of Rs50 crore, even a minimum float requirement of 50% will mean floating stock worth only Rs25 crore. It will be much easier to manipulate shares of the latter than the former. As far as the argument on sharing benefits with the public goes, promoters will always argue that they shouldn’t be forced to share wealth (in greater proportion) they have created.
This is not to say that there isn’t a case for increasing public shareholding. But the objective of doing so should be to improve governance standards in listed companies. Currently, non-promoter shareholders are treated as second-class citizens. They hardly have a say in important decisions made by the company. In this backdrop, having a float of 10%, which many Indian companies are currently allowed to have, is akin to issuing non-voting shares. With a 25% stake, public shareholders can have a greater say in the governance of a company. With improved governance as the objective, policymakers can even consider amending regulations, other than just listing rules, to support public shareholders’ rights.
While it’s true that Indian shareholders, especially Indian financial institutions, need to play a more active role in the governance of investee companies, the government must do its bit in promoting such a culture.
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