The Securities and Exchange Board of India (Sebi) has stuck to its guns and penalized firms that haven’t met the deadline for increasing public shareholding to 25%. The immediate penalties such as restricting dividend payout to the promoter group don’t appear harsh. But Sebi has reserved the right to levy monetary penalties, initiate criminal proceedings and resort to other penalties if these firms remain non-compliant.

To be sure, promoters of many companies that couldn’t meet the deadline will continue to make efforts to reduce their stake. But for a large number of firms, this will remain a monumental task. Here’s why: of the 105 companies that have been penalized, 33 are already suspended by stock exchanges for other reasons, 14 companies have a negative net worth, eight have a price-to-book ratio of less than 0.5 times, four others trade at less than their face value, and four firms are part of a group of stocks that trade in periodic call auctions due to low liquidity. Together they make up 60% of the list of companies penalized by Sebi.

To expect these firms, already shunned by investors, to suddenly make successful equity issuances may not be reasonable at all. Why, even relatively better-off firms such as Omaxe Ltd have been struggling to offload shares in the past month.

Sebi may argue that companies that struggle to find investors can opt for issuing free bonus shares to minority shareholders and meet the minimum public holding requirement—but that won’t be fair. Or they could look at alternatives such as a rights issue at a discount only for minority shareholders, if there aren’t enough takers at the current traded price. But the regulator needs to consider investor appetite as well as the effort made by the firms before making any judgements.

As far as government companies go, while the restriction on dividend payout will hardly hurt, the strictures on voting rights will have an impact. There are a few public sector firms that are yet to meet their deadline of increasing public shareholding to 10% in August this year. Some such as MMTC Ltd and National Fertilizers Ltd have a public shareholding of less than 2% and Sebi’s formula for the restriction on voting rights means that the government can take a large hit, unless of course it successfully sells its shares. The saving grace is that these companies’ dividend payout is relatively low.

Ravindra Sonavane contributed to this analysis.