One would expect a 'public' company to have at least the stipulated number of public shareholders. However, a large number of such companies don't have the required 10 per cent of such shareholders. In some cases, barely 5 per cent of the company's stock is held by retail investors, while the remaining 5 per cent is held by the promoters' associates. So the recent government notification that listed companies should have a minimum of 25 per cent public shareholding is a big pro-investor step. Loosening the hold of promoters may give small investors a greater say in corporate decisions.
The move implies that about 180 companies may have to raise nearly Rs 1.5 lakh crore over the next couple of years. A higher free float will improve liquidity across stocks and expand the universe of investible options. Also, dispersed shareholding will present fewer opportunities for collusive practices, including rigging of share prices.
While most experts agree that the intent is good, not many are convinced that the benefits will actually trickle down to shareholders. Here are some concerns that have been raised.
Primary market still fragile: The secondary market has definitely bounced back from last year's lows, but the primary market is still relatively fragile. The recent IPOs have seen poor retail participation. Even the response to issuers with good quality projects and modest pricing has been lukewarm. Some experts believe that due to the market volatility, companies seeking to raise public holding will see their scrips carry a valuation discount and those floating IPOs may witness low demand. "There are 35 companies that have approvals for equity issues, but don't have the courage to enter the market. How do you expect other companies to suddenly start raising this kind of money?" asks Prithvi Haldea, chairman and MD of Prime Database.
Global spoilsport: The Indian market is dependent on external capital, so the global risk appetite will have to be conducive for the issues to succeed. However, due to the volatility in European markets, FIIs may not be enthusiastic about all the issues.
No concrete plans to use cash: The cash raised from the listing has to be utilised efficiently if the return on equity has to remain intact. Most companies that do not need additional funds will have to review their dividend policies to give back some of the surplus money to their shareholders. This might not be healthy for companies in the long run and balance sheets could face unnecessary strain. In the power sector, NHPC, JSW Energy and JP Power Ventures tapped the capital market recently for their projects. However, in keeping with the new notification, they may be forced to enter the market again.
Tougher for genuine issuers: An oversupply of primary issues may make it difficult for genuine issuers to tap the markets. A preference for incremental offering by listed entities will lead to planned new listings being held back. Some sectors like infrastructure, which are heavily dependent on the market for funds, could face pressure.
MNCs may go private: Some companies may be unwilling to keep a minimum public float, preferring to buy back the public shares and go private. So shareholders may miss out on good MNC stocks. "The parent company may not be willing to offload its stake and could choose to delist," says Jagannadham Thunuguntla, equity head, SMC Capitals. As many as 22 MNCs, whose public shareholding is less than 25 per cent, are listed in India.
However, if one is not looking for immediate listing gains, the move may offer good long-term bets. Still, before investing in a company, check that it has sound fundamentals.
