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K S Chalapati Rao: Looking for clarity

There is a need to focus on issues such as the definition of ?public?, the maximum promoter holdings and identification of control

K S Chalapati Rao  |  New Delhi 

Two months have already passed since the private sector sought three months time for a discussion on the June 4 amendments to the Securities Contracts (Regulation) Rules, which made a minimum public shareholding of 25 per cent mandatory in stock exchange-listed companies, and since the government expressed its readiness to review the same. One is not, however, aware of any further development in this regard. It has taken nearly nine years to bring this amendment and there was considerable discussion when the finance ministry issued a discussion paper in January 2008. It is strange that further discussion is required even now.

The objectives behind the move to enforce 25 per cent minimum public shareholding, as stated by the discussion paper, were: improving liquidity, reducing the scope for share price manipulation and enabling the public to share the wealth generated by private enterprise. In the process, it raised some pertinent issues, especially regarding the definition of public shareholding and the special treatment meted out to public sector units (PSUs). The discussion paper did, however, reveal its preference to have more companies listed on the stock exchanges and its preparedness to concede control to the private promoter. In this background, this note discusses the present dimension of the problem, need for clarity on public shareholding and some implications of allowing the promoters to have up to 75 per cent shareholding.

Though the number may vary following the availability of shareholding pattern for the quarter ending June 2010, calculations based on the shareholding pattern at the end of March 2010 and market capitalisation in early June 2010 suggest that there were 227 companies that had less than 25 per cent public equity (defined as non-promoter shareholding excluding the shares held by custodians). Thirty-nine of these were PSUs. If promoters of all the 227 companies offload their excess shareholding, the value of such shares would be around Rs 1,50,000 crore. If, on the other hand, new shares are issued by these companies to non-promoters, the value of such shares would be roughly Rs 2,00,000 crore. In both the cases, the share of PSUs works out to as much as 84 per cent. Just 10 out of the 188 private sector companies account for two-thirds of the total offloading in the former case. In all, 30 companies account for 90 per cent of the non-PSU offloading. Among these, foreign companies may, however, prefer to delist rather than dilute their promoter equity. Out of the 159 non-PSU Indian companies, as many as 93 belong to the BSE’s least preferred T or Z groups. Since there would be no takers, such companies would have to delist rather than raise capital. If the PSUs are treated as a separate category, the problem is thus limited to a few private sector companies; and since the dilution can be made over a period, the issue could be sorted out directly with each of the affected private sector companies.

If this is all, then there is not much to be discussed. Interestingly, the private sector wants to know whether private equity investors would be treated as public or not, thereby once again raising the important question of the definition of the public, which the government ignored even after bringing it up in the discussion paper. A close scrutiny of the reported shareholding data does suggest the existence of ambiguity in the categorisation of public shareholding as also possible deliberate misclassification both by large and small companies. The latter practice was well demonstrated in the Securities and Exchange Board of India’s investigations into the shareholding pattern of Bank of Rajasthan. There is also considerable scope for reviewing the public shareholding of PSUs. Moreover, certain shareholders like employee welfare funds and strategic investors would not trade their shares in the normal course. This fact, indeed, is taken note of when calculating share price indices based on the free float methodology. For instance, the weights assigned to the market capitalisation of RIL, ONGC and Cairn India in calculating S&P CNX Nifty clearly suggest that the shares of certain group companies and strategic investors are not treated as free-float shares in spite of their being classified as public shareholders. If free-float shareholding is taken as public shareholding, both ONGC and Cairn India would have to dilute their promoter shareholding. Otherwise they need not do it. One cannot rule out more such cases of public shareholders owning less than 1 per cent of the total shareholding. An extreme way is to take only Indian individual shareholders as public, which will be in line with the government’s stated objective of redistribution of wealth. The issue will then be wide open as the number of affected companies would be more than 1,600 and the required divestment of promoter shareholding would be almost Rs 10,00,000 crore.

If promoters hold 75 per cent stake, there would neither be meaningful redistribution of wealth nor resource mobilisation. Also, promoters would have no difficulty in passing all types of resolutions in annual general meetings. At one time, the minimum public offer was 60 per cent; and under the joint sector scheme, the private promoter was ready to accept just 26 per cent share in equity. Promoter shareholding should, therefore, be targeted for a more reasonable level. With substantially lower level of promoter holding, the question of whether public should include only individual investors or not would also become far less relevant. The discussion, therefore, should focus on the definition of public, the maximum permissible promoter shareholding and identification of promoter group’s ownership and control.

Based on the author’s paper “The Arduous Route to Ensuring Some Minimum Public Shareholding in Listed Companies”

Views expressed are personal and do not necessarily reflect the official policy or position of the Institute for Studies in Industrial Development, Delhi

First Published: Thu, August 12 2010. 00:18 IST