How the new promoter holding rule will impact companies

This move will benefit public sector undertakings more than private sector players

While the market was expecting companies with promoter holdings greater than 75% to buy the residual equity and delist the company or offload their shares, Sebi’s (Securities and Exchange Board of India) new rules have brought some cheer.

Sebi has allowed these companies to issue bonus shares or rights issues in which promoters will not be allowed to participate. This way, the shareholding of non-promoters will increase while that of the promoters can come down from over 75% by June 2013.

The move, however, is likely to benefit public sector companies more than private sector ones. Most of the bigger companies are public sector companies such as Hindustan Copper, MMTC, Fertilisers and Chemicals Travancore, National Fertilizers, Neyveli Lignite, ITI, RCF, Coal India and NMDC.

In the private sector, the list of companies includes Reliance Power, Oracle Financial, Jet Airways, Essar Ports and Adani Enterprises.

It is very likely that most of these companies will resort to issuing a conservative bonus issue in order to bring promoters holding just below the prescribed norm.

However, in the long run such a move will result in a bloated equity capital and thus, a lower earnings per share. As the bonus shares will be issued only out of compulsion and not strong performance, servicing the higher equity base is a long-term negative move.

As for the rights issue, very few companies could hope to get their issues subscribed, unless they price it at a significant discount to the market price. But the same logic of unnecessary dilution of equity base holds true for rights issues. Apart from these methods, promoters do have the option of selling the stocks at a discount to current market prices or sell through a placement.

Though the stocks might react positively to the bonus news, when companies announce them, it can be used as an exit option by savvy investors.