Govt's plan to increase free-float in MNCs to 65% triggers sell-off

Shares of multinational companies (MNCs) have been on a downward slope since the Union Budget. Top MNCs such as Siemens, ABB India, and Honeywell Automation have seen their stock prices correct between 7 and 11 per cent over the past four trading sessions. In comparison, the benchmark Nifty has declined 3.7 per cent.

Market players say the sell-off in MNC stocks could be on account of the government’s proposal to increase free-float in listed companies by another 10 percentage points to 65 per cent. MNCs are tightly-held companies with foreign promoters owning 75 per cent in most cases — the maximum permitted under the existing law.  “It is the right time to consider increasing minimum public shareholding (MPS) in listed companies. I have asked Sebi to consider raising the current threshold of 25 per cent to 35 per cent,” said Finance Minister Nirmala Sitharaman in the Budget speech.

The Securities and Exchange Board of India (Sebi) is currently examining the finance ministry’s proposal to raise the public shareholding threshold from 25 per cent to 35 per cent. The regulator expected to issue a framework for public consultation soon.

“The recent Budget announcement of a proposal for listed companies to increase public shareholding has seen the markets react negatively, particularly to MNC companies in which promoter holding is well above 65 per cent,” said Dhirendra Tiwari and Abhijeet Singh, analysts at Antique Stock Broking in note. “The risk of fresh supply of shares could be an overhang on these stocks in the near term.”

Experts said most MNCs command high valuations — scarcity premium — as their current free float is limited. If more shares enter the market, it is likely that MNC stocks could be de-rated, they added.

Most MNCs will have to dilute substantial stake if the proposal is implemented. Besides the free-float proposal, a 20 per cent tax on buyback distribution is also negative for MNCs, most of which are cash-rich. "Both additional taxation on buybacks and the higher float proposal have been seen as negative for MNC stocks,” said Abhimanyu Sofat, vice-president (research), IIFL.

Market players said the tax on dividend distribution as well as buybacks will eat into earnings of companies, leaving them with less cash to distribute to investors. Analysts at Antique, however, believe the ongoing correction is a good buying opportunity for investors to pick good MNC stocks. “Given the strong business fundamentals of Siemens, ABB and Honeywell, we continue to like the stocks, and any correction should be seen as a buying opportunity,” they said.

The brokerage says its proprietary Antique MNC 40 Index has provided consistent returns over a long period of time, outperforming the Nifty in 11 out of the last 16 years.