Not the sole cure

Promoter stake dilution may work with shareholder activism

The Securities and Exchange Board of India (Sebi) has cracked down on 105 companies, which failed to comply with the regulator's directive to attain a minimum public shareholding of 25 per cent by the deadline of June 3. An interim order has restrained the non-compliant promoters from raising funds from the market, frozen their voting rights, restricted their receipt of dividends and bonus shares, and barred them from share transactions except for the purpose of compliance with minimum public shareholding. The order reserves the right to take further action such as imposing fines, criminal prosecution and so on. This signals the market regulator's determination to enforce such norms announced three years ago. Promoters were given ample time to dilute their stakes to the upper limit of 75 per cent. The government has to reduce its stakes in listed public sector undertakings (PSUs) to 90 per cent by August. The regulator relaxed rules to allow dilution through a wide variety of methods, including issuing bonus or rights or through institutional placement programmes and direct offers for sale. PSUs have easier options since government-owned institutions like LIC can step in. But most companies have managed, one way or another, to reduce promoter holdings to 75 per cent by the deadline. Many opted for institutional placements or offers for sale, while others issued bonus and rights shares. Some have tried unusual methods. Wipro, for example, shifted excess promoters' holdings to a charitable foundation. Some have tried the strategy of reclassifying shareholders previously listed in the "promoter" category to the "public" category. Others, like Gillette India, have sought legal options.

In total, an estimated Rs 63,400 crore worth of stake dilution has occurred since the deadline announcement. Many promoters, such as Novartis and Jet Airways, sold stakes at discounts as the June 3 deadline loomed. It is estimated that 75 companies diluted Rs 11,000 crore worth of shares just before the deadline. A dozen or so listed PSUs still have to dilute by about Rs 14,400 crore before August. The list of 105 offenders contains many familiar names such as Adani Ports, BGR Energy Systems, Essar Ports, Videocon, Bombay Rayon, Omaxe, and Tata Teleservices (Maharashtra). However, others in the list are basket cases. As many as 33 firms have been suspended from stock exchanges for various reasons. Of the 72 actively traded companies, many are loss-making, 14 have negative net worth, and 12 more are trading at discounts to face value. There is no realistic way for these businesses to meet the new minimum public shareholding norms.

The theory behind these norms is impeccable. A larger public shareholding should, in theory, correlate to better corporate governance and better treatment of minority shareholders. More liquidity leads to better price discovery and reduces chances of price manipulation. More dispersed ownership should translate into wider retail participation in equity markets. But it remains to be seen how much of this works out in practice. Institutional shareholdings remain high, while retail holdings have barely increased. In PSUs, the government stakes effectively remain unchanged since excess holdings have been sold to government-controlled institutions. The minimum public shareholding norms may also cause some complications in future mergers and takeovers. Global practice suggests corporate governance improves only when large financial institutions demand their rights as shareholders, enforcing them via legal action if necessary. This sort of shareholder activism is rare in India. Institutions avoid asking promoters awkward questions, let alone confronting them or going to court. Until such time as financial institutions in India embrace a culture of shareholder activism, Sebi's good intentions might not translate into better governance on the ground.