Equity worth Rs 5 lakh crore will hit the market to meet the new public shareholding threshold of 35 per cent and meet the disinvestment target at a time when the financial system is reeling under a severe liquidity crunch.
Not surprisingly, this pulled down the BSE Sensex by 793 points to close at 38720 points on Monday after Finance Minister Nirmala Sitharaman announced on Friday that promoters need to bring down their shareholding from 75 per cent to 65 per cent in listed companies. The government, however, has not given a time frame for implementation of the proposal.
"If this measure is implemented anytime soon, we will most likely get into a two-year bearish phase in the stock market," G Chokkalingam, Founder & Managing Director at Equinomics Research and Advisory told Business Today.
"If we enforce the 65 per cent limit (for promoters) even in the next two years, the system requires around Rs 4 lakh crore of fresh capital to absorb the selling of these shares by promoters," he said.
Currently, more than 600 companies have over 65 per cent promoter equity. Combined with the government's disinvestment target of Rs 1.05 lakh crore, the total need for fresh capital will be over Rs 5 lakh crore. Some of top companies wherepromoter shareholding is over 65 per cent include Wipro, Tata Consultancy Services and Hindustan Unilever Ltd.
The overall market capitalisation reached an all-time high of Rs 157 lakh crore in January 2018 from Rs 84 lakh crore in May 2014 during the previous NDA regime, clocking a growth of 83 per cent. "But there has been a severe polarisation in the performance of the market," he said, pointing out that only Nifty50 stocks have participated in consolidating the gains.
If gains made by these stocks are removed, over 2,000 stocks have lost a total of Rs 20 lakh crore market capitalisation compared to January 2018 as on last Friday. And these are mostly mid-cap and small-caps, where the bulk of investors have put in money. "This shows drying up of liquidity in the hands of retail investors," he added.
Moreover, risk appetite of HNIs has also dwindled over the last two years, raising questions over possible buyers once the equity is offloaded.
In such a scenario, any fresh equity hitting the market will not receive the right valuation, hurting promoters. "This possible equity sale would happen at only very low valuation and it will further increase the polarisation besides huge wealth destruction for retail investors," Chokkalingam added.
The move is also likely to hit the fund-raising plans of new companies as they will have to compete for funds with established companies.
In such a scenario, he said it would be best for the government to push back the move by at least three to four years.
This is the second time the government has asked promoters to reduce their holdings in their company. In June 2010, companies had been given a three-year period to increase the public shareholding to at least 25 per cent.