Budget 2019: Minimum public float in listed companies now at 35%

Illustration by Binay Sinha
The Centre is planning to increase the minimum public float in listed firms to 35 per cent from 25 per cent now. The government has directed the markets regulator Securities and Exchange Board of India (Sebi) to vet the proposal and work on its implementation.

“It is the right time to consider increasing minimum public shareholding (MPS) in listed companies. I have asked Sebi to consider raising the threshold to 35 per cent,” said Finance Minister Nirmala Sitharaman in the Budget speech. 

Market players say the proposal will help attract higher foreign capital and increase India’s weight in MSCI and FTSE indices. However, it could pose a challenge to listed companies, particularly multinationals (MNCs), forcing some of them to consider delisting. 

There are more than 1,300 firms actively trading on the bourses with promoter holding above 75 per cent. These will be required to either issue fresh shares to dilute promoter holdings, or direct the promoters to divest their stake to meet the new MPS threshold. At current prices, shares worth Rs 4 trillion will require a change of hands from promoters to public shareholders. 

The fear of excess supply entering the markets weighed on stock prices, on Friday. Industry players, however, said the market regulator would provide enough time for firms to comply so that share sales don’t get piled up. 

In 2010, Sebi had given listed firms three years to meet the 25 per cent MPS norm. Before the MPS norms were introduced, many listed firms had promoter holding exceeding 90 per cent. This led to distorted price discovery and promoters benefited at the expense of minority shareholders, said experts.

India has traditionally been a promoter-driven market and raising the threshold will ensure wider ownership through institutional investors, more market depth, and better corporate governance. 

High promoter holding remains the biggest hurdle for raising India’s weight among key global indices. The MSCI Emerging Markets Index, for instance, uses free-float market capitalisation for assigning weight. An increase in weight could potentially bring in millions of dollars in foreign institutional inflows. However, a rise in MPS could impact JVs and promoters’ control over their companies. 

“It will cause significant hardship for promoters who would need to dilute substantially, which would affect their control over the company,” said Rishabh Shroff, partner and co-head (private client practice), Cyril Amarchand Mangaldas. 

Experts said once the rules are formalised by Sebi, listed companies with foreign promoters may consider delisting. MNCs that do opt to take their shareholding to 65 per cent, may find it difficult to delist at a later stage.

Experts say implementing the 35 per cent MPS requirement won’t be difficult for Sebi, given the framework has already been laid down. In order to help listed firms achieve 25 per cent MPS requirement, Sebi introduced new share sale methods such as offer for sale (OFS) and institutional placement programme (IPP). These were aimed at insuring that share sales saw wider participation from investors.

Following the expiry of this deadline in June 2013, 105 listed companies were found to be non-compliant with these norms and necessary action was initiated.

Achieving MPS norms has particularly been a problem for public sector undertakings (PSUs). In 2014, the government had notified rules for a minimum 25 per cent public shareholding in listed PSUs. To comply, over 30 listed PSUs were required to raise their public shareholding to 25 per cent by August 21, 2017. They were, however, given multiple extensions. 

Among private firms, TCS, Wipro and Avenue Supermarts will have to divest the most to bring down promoter holding to 65 per cent. Among PSUs, GIC Re, Bank of India and Hindustan Aeronautics require the highest disinvestment.

Easier norms for FPIs 

Foreign portfolio investors (FPIs) are set to reap major benefits. The Budget proposes to rationalise and streamline existing KYC norms for FPIs to make them more investor friendly, without compromising the integrity of cross-border capital flows. 

The Budget has proposed an increase in the statutory limit for FPI investment in a firm from 24 per cent to the sectoral foreign investment limit. 
At present, the Foreign Exchange Management Act (Fema) allows FPIs to collectively invest up to 24 per cent in a listed entity. Firms are allowed to increase this aggregate limit up to the sectoral cap/statutory ceiling, as applicable with the necessary board approvals and/or resolutions. 

FPIs will be permitted to subscribe to listed debt securities issued by ReITs and InvITs. The budget has proposed merging the NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment Route.