Monday, June 7, 2010

25% Free Float Requirement Becomes Law

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.

12 comments:

Jayant Thakur, CA said...

What about Clause 40A of the Listing Agreement? No mention in the amendments to it.

Umakanth V. said...

@ Mr. Thakur. Thanks for your comment, and for highlighting the fact that Clause 40A of the Listing Agreement as it currently stands is at variance with the amended Securities Contracts (Regulations) Rules (SCRR). It appears that there should be another step in the process in order to close the loop, which is that SEBI should amend Clause 40A of the Listing Agreement to bring it in line with the amended Rule 19and the newly introduced 19A of the SCRR.

Jayant Thakur, CA said...

Thanks, Mr. Umakanth, for the reply and clarification.

Anonymous said...

Clause 40A of the equity listing agreement will have to amended appropriately including clause 40A(viii) to include QIB placements, unless the intention is to seek prior approval of SSE under clause 40A(viii)(d) for doing QIB placements.

Kind regards,
Yogesh

Anonymous said...

Dear Mr. Umakanth,

The amended Rule 19A(1) of the Securities Contracts (Regulation) (Amendment) Rules, 2010 (“SCRR Amendment”), provides that “ … any listed company which has public shareholding below 25% on the commencement of the SCRR Amendment, shall bring the public shareholding to the level of at least 25% by increasing its public shareholding to the extent of at least five per cent per annum beginning from the date of such commencement, in the manner specified by SEBI”.

The amended Rule 19A(2) of the SCRR Amendment provides that “ … where 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 twelve months from the date of such fall in the manner specified by SEBI”.

Does this imply that presently the outer limit within which the public float in an existing listed public company (which has public shareholding below 25%) is to be increased from existing levels to the meet the mandatory 25% requirement is 12 months from June 4, 2010? Would this also mean that companies such as DLF, Reliance Power, Wipro, SAIL, MMTC etc.(all of whom have public shareholding below 25%)would have use ensure that the minimum public float requirements is met (either by way of primary issuances or secondary transfer) by June 4, 2011?

Any thoughts on this.

Regards,

A Curious Associate

Rahul said...

hi Umakanth,

I agree with Sandeep that the timing of this amendment could have been better. On many aspects the picture will become clear once we have a chance to review the SEBI circulars and amendments to the listing agreement and ICDR.

Also, the drafting of 19A.(2) needs to be reviewed. The intention appears to be to cover the situation post a company achieving the 25% public holding under 19A(1), however as presently drafted it would cover all companies below 25% at the time of the amendment. Which means in effect everyone theoretically has 1 year to complete the firesale.

Umakanth V. said...

@ Curious Associate and Rahul. Thanks for your question and observation respectively. Although there does exist some ambiguity as you have observed, it is my understanding upon a conjoint reading of sub-rules (1) and (2) of the new Rule 19A differ in terms of the times at which they operate.

Sub-rule (1) is a transitional provision. It allows for companies to increase their public shareholding by 5% per annum. It applies to all companies that currently (as of June 4, 2010) have less than 25% public shareholding. Hence, the companies that you have listed in your comment will fall within this category, and they need to sell-down 5% each year to be public.

Sub-rule (2) is a forward-looking provision. It applies to companies that currently (as of June 4, 2010) have more than 25% public shareholding, but which shareholding thereafter drops below 25%. Such companies are given a period of 12 months to make up the shortfall by selling down to the public.

Umakanth V. said...

Two other follow-up observations:

1. The Rules repeatedly refer to increase in public shareholding "in the manner specified by the Securities and Exchange Board of India". Hence, before the new regime is made operations, it appears that SEBI will have to come up with detailed guidelines on manner of dilution to the public to maintain the 25% free float.

2. The exclusion of ADRs/GDRs from the definition of "public shareholding" could introduce further complexities for companies that have issued such instruments.

Smitha said...

Hi Umakanth,

There have been multiple reports that any dilution must be undertaken by way of an FPO / QIP, but a plain reading of the amendments do not suggest so. Is this because it is specified elsewhere? If yes, does this mean that the promoter / promoter group cannot dilute its shareholding through regular sale of shares on the stock market?

Anonymous said...

Dear Smitha,

As stated earlier, please refer to clause 40A(viii) of the equity listing agreement.

Other views welcome.

Kind regards,
Yogesh

Anonymous said...

Dear Umakanth,

As regards the observation made by you that "The exclusion of ADRs/GDRs from the definition of "public shareholding" could introduce further complexities for companies that have issued such instruments", please note that this was anyways case even under the present clause 40A of the equity listing agreement.

Best regards,

Unknown said...

For the big corporate giants it is near to impossible to increase there public share holding to the extent of 25% in 12 months in the persuence of rule 19A(2) of ICRR. I hope sebi will increase such time limit by considering requirement of Indian capital market