With all listed companies having to raise their public shareholding to a minimum 25%, there is bound to be a deluge of paper in the markets in the next two years. This could either be in the form of offers for sale of promoter-owned shares or an issue of fresh shares to the public. According to data collated by Edelweiss Research, assuming that companies would choose offers for sale, there would be issuances worth Rs1.5 trillion in the next five years. In the first two years, i.e., fiscal year 2011 and 2012, paper worth Rs61,500 crore and Rs43,900 crore, respectively, will hit the markets. The pertinent question is: Will the market be able to absorb such a large amount of issues?

Graphic: Ahmed Raza Khan/Mint

This is not to say that the secondary markets will always underperform when primary market activity is high. But for both markets to perform well, liquidity needs to be exceptionally high. A good example is what happened in fiscal 2008, when Indian companies raised a record Rs1.66 trillion from issuances of equity and equity-linked instruments. Still, the secondary markets delivered a solid 30% return during the year, despite a sharp correction since January 2008. (Till January, the markets had risen by about 75%.) But that kind of high-liquidity environment is not common.

The problem about the finance ministry’s directive is that Indian companies have to make primary market issuances regardless of how high or low liquidity is. During lean periods, this could drag down the markets.

Also, companies where public shareholding is much lower than 25% typically trade at an inflated price and these stocks can be expected to correct when the stake dilution happens. Thankfully, however, most such companies are not part of broad market indices and would not adversely affect most portfolios. The research by Edelweiss shows that of the Rs1.5 trillion that needs to be raised to meet the public shareholding norms, Rs1 trillion pertains to eight large public sector enterprises. The top 15 names account for 83% of the total amount that needs to be raised. So while the aggregate amount to be raised looks very large, much of this will be restricted to a few large names.

We welcome your comments at marktomarket@livemint.com