More than two years following the issue of a discussion paper on the topic, the Ministry of Finance (MOF) has on June 4, 2010 amended the Securities Contracts (Regulation) Rules, 1957 to set a limit of 25% minimum public shareholding for initial listing by companies on Indian stock exchanges as well as continued listing. MOF’s press release accompanying the notification summarizes the new requirements:
a) The minimum threshold level of public holding will be 25% for all listed companies.
b) Existing listed companies having less than 25% public holding have to reach the minimum 25% level by an annual addition of not less than 5% to public holding.
c) For new listing, if the post issue capital of the company calculated at offer price is more than Rs. 4000 crore, the company may be allowed to go public with 10% public shareholding and comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum.
d) For companies whose draft offer document is pending with Securities and Exchange Board of India on or before these amendments are required to comply with 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum, irrespective of the amount of post issue capital of the company calculated at offer price.
e) A company may increase its public shareholding by less than 5% in a year if such increase brings its public shareholding to the level of 25% in that year.
f) The requirement for continuous listing will be the same as the conditions for initial listing.
g) Every listed company shall maintain public shareholding of at least 25%. If the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall.
At a conceptual level, is hard to quarrel with this new streamlined requirement. First, it prescribes a uniform limit of 25% public shareholding for all companies irrespective of what requirements applied to them at the time of their initial listing. Historically, companies were permitted to list at varying levels of public shareholding such as 40%, 25% and 10% thereby causing disparity regarding continuing requirement among listed companies (as previously discussed here). Second, by requiring several companies (including public sector undertakings) whose promoter shareholding is greater than 75% to sell down to the public, the change will induce greater liquidity in the Indian stock markets, which will benefit small investors. Third, by reducing concentration of ownership in Indian companies, it is also expected to result in ancillary benefits such as enhanced corporate governance through greater voice provided to minority shareholders, particularly institutional investors.
However, the new regime is likely to generate some difficulties, at least in the near term. For example, there are doubts about whether the depth of the Indian markets is adequate to absorb the stream of securities offerings that are likely to flood the capital markets. Listed companies too would be under pressure to offer securities to comply with the new requirements without having regard to market conditions, which may in turn impact valuations. Even from a legal and regulatory perspective, the devil, as usual, lies in the detail, and some elements of the new regime continue to elude clarity. For instance, while the expression “public” is defined to include persons other than the “promoter and promoter group”, the latter expressions are defined widely. Even the scope of the expression “control”, which is a crucial element of the definition of “promoter” is a subject-matter of litigation (as previously discussed here), and the issue is currently pending before the Supreme Court. Finally, the consequences of violating these new provisions assume importance. Although various options such as delisting, penalty and fine are available generally under the Securities Contracts (Regulation) Act, the appropriate and effective utilization of these remedies by the regulators would determine the success of the effort towards diffusing shareholding in the Indian capital markets.