Minimum 25% public holding must for listed firms

The government on Friday made it mandatory for listed companies to raise public shareholding to 25 per cent, with at least 5 per cent dilution a year, a move that would attract more investors and check price share manipulation.In keeping with the Budgetary promise, the Finance Ministry amended the relevant regulations to the effect that "the minimum threshold level of public holding will be 25 per cent for all listed companies."Accordingly, all listed entities would have to dilute at least 5 per cent additional equity annually till they reach the threshold limit of 25 per cent. And fulfilment of this condition would be must to remain listed.The new rules were announced shortly after close of stock market today. Among the listed companies, there are 29 PSU companies and 179 other companies that have public shareholding below 25 per cent, according to CRISIL. There are over 4,500 listed companies in India. Some large companies that have to increase public shareholding include Wipro, NHPC, DLF, Power Grid and NMDC.For a company seeking listing, it would have to dilute 25 per cent in one go in case the issue size is just up to Rs 4,000 crore. However, those already in the process of going public and have filed draft prospectus could disinvest stipulated 10 per cent and later meet the condition notified on Friday. The government has made it mandatory for listed companies to raise public shareholding to 25% All listed entities would have to dilute at least 5% additional equity till they reach the 25% limit. Fulfillment of this condition would be must to remain listed. At present many companies dilute only 10% stake and their shares tend to trade at a premium The decision on mandatory increase in public exposure of a company to 25 per cent had been hanging fire for more than a year due to differences the market regulator Sebi had with the Finance Ministry. While Sebi's contention was that such broad-basing would require huge funds, which some estimates pegged at over Rs two lakh crore, the government was firm on enforcing the decision announced in the 2009-10 Budget as an effective means to check price manipulation by promoters.A top government adviser on financial sector and HDFC Chairman Deepak Parekh said last week that the increased public exposure was one of the effective ways to tackle the problem of over-pricing of public issues. “This step is a positive move. The good quality issues will attract a lot of FII flow. And higher public shareholding will force promoters to be more accountable to the investor community. This will also give a clear roadmap for disinvestment of PSUs," said Prateek Agarwal, head of equities at Bharti AXA Investment Managers. The Finance Ministry had come out with a discussion paper in February 2008 and was to complete the discussion in May that year, but the same could not happen on account of divergence of views. Thereafter, Finance Minister Pranab Mukherjee came out with the proposal while presenting the 2009-10 Budget in July 2009. The argument was that larger the number of shares and the number of shareholders, the less is the scope for price manipulation. At present, most companies dilute just 10 per cent stake and the shares tend to trade at a premium.The announcement further said that all listed companies will be required to maintain at least 25 per cent public shareholding for all times to come. "If the public shareholding in a listed company falls below 25 per cent at any time, such companies shall bring the public shareholding to 25 per cent within a maximum period of 12 months from the date of such fall", it added.Giving the rationale for the decision, the Finance Ministry said, "A disperse shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices."The decision, which was notified today, would see large number of companies hitting the capital market within a year.The move is in line with practices followed in developed economies globally. While the London Stock Exchange requires 25 per cent minimum public holding, the Singapore and Hong Kong Stock Exchanges also stipulate public share holding between 12 per cent and 25 per cent.The requirement to offload equity by large number of listed companies may have implications for the disinvestment programme of the government. The government proposed to raise Rs 40,000 crore during the current fiscal by selling equity of state-owned companies.