Monday, September 15, 2008

Draw the line clearly for public shareholding

Last week the Economic Times reported here that listed companies would soon have to increase their public shareholding levels – possibly by 3 – 5% annually until they become compliant with continuous listing requirements.

Whether the minimum public float should be 25% or 20% is a matter of policy wisdom. The law always has to draw a line somewhere and treat people on either side of the line evenly. The key is to make people aware of the law and to ensure that one who has conducted oneself on the basis of known law is not jeopardized under a new law.

Laws can always change. However, when a law is changed, people used to working under the old law ought to get adequate time to re-arrange affairs to remain compliant even under the new law.

The minimum level of public shareholding has remained a tricky area of regulation. Growing Indian companies are dynamic and their public shareholding cannot be expected to stagnate. Mergers, strategic and private equity investments, and stock-funded acquisitions could always lead to shrinkage in public shareholding. So long as the level of public float does not hamper traded volumes and thereby price discovery for the stock in the market, a more “lenient” yardstick may also be applied – such thinking is what led to the current regime of permitting a 10% public float for companies having a market cap of Rs. 1,000 crores and at least two crore issued shares.

Tied into this regime would be the framework for delisting companies. The term “delisting” has come to represent anathema for Indian regulators. The law should clearly lay down the level of shrinkage in public shareholding that would be needed for a delisting effort to be successful. Even if the lawmakers do not think the line drawn for continuous listing requirements should also work for successful delisting, they owe it to the system to transparently draw another line for declaring a delisting effort to be successful, and also specify what one needs to do when leading life in between these two lines.

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