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Minimum public shareholding at 35%; here's how it will impact stock market liquidity

While the move is positive for minority shareholders and it will lead to a better price discovery, some MNCs with low public float may even prefer to delist instead of relinquishing their stakes

Aprajita Sharma  New Delhi     Last Updated: July 5, 2019  | 19:46 IST
Minimum public shareholding at 35%; here's how it will impact stock market liquidity
Union Budget proposes to increase the minimum public shareholding in listed firms to 35% from 25%

The proposal to increase the minimum public shareholding in listed firms to 35 per cent from 25 per cent, if implemented, may potentially squeeze liquidity in the secondary market, as many multinational companies and firms with high promoter holdings will have to come out with FPOs, QIPs or other tools to reduce stakes. While the move is positive for minority shareholders and it will lead to a better price discovery, some MNCs with low public float may even prefer to delist instead of relinquishing their stakes. Data compiled by brokerage Centrum Broking showed that promoters in 1,174 listed companies will have to offload their stakes to meet this requirement. This is 25 per cent of the total listed universe. In value terms, TCS (Rs 59,600 crore), Wipro (Rs15,000 crore) and D-mart (Rs 14,000 crore) will need to pare stakes. In all, MNCs, banks and IT companies will be the most hit.  

"At current market prices, the total quantum of sale that needs to be done by these 1,174 companies works out to be a whopping Rs 3,87,000 crore," says Jagannadham Thunuguntla, Sr. VP & Head of Research (Wealth), Centrum Broking.

To offload or to delist

Amar Ambani, president and research head, YES Securities said that many MNCs listed on stock exchanges may consider delisting. "In many mid and small caps, it is better to have more promoter skin in the game, since India's capital market is in developing phase."

Also Read: Why stock market gave a thumbs down to Union Budget

Moin Ladha, Partner, Khaitan & Co agrees. "Increase in public shareholding to 35 per cent takes away the ability to unilaterally manage companies with ability to pass special resolutions. That said, some companies may consider going private by making delisting offers," he points out.

Sectoral concentration

Vinay Pandit, Head - Institutional Equities, IndiaNivesh Securities says the larger public participation will lead to an increase in free float over the next two years, leading to several INs and OUTs of the Nifty, which is currently based on free-float methodology. Free float is the portion of shares held by public investors against restricted promoter holding.

According to Pandit, the Index will become more BFSI and consumption heavy unless sectoral caps are brought in. However, this will offer greater float in the market for institutional participation, he adds. He sees MNCs, insurance companies and consumer companies to stay in focus.

Positive for minority shareholders

Promoters tend to influence the verdict whenever special resolutions are moved. If their shareholding moves down, public shareholders will have relatively larger say in such resolutions. Besides, raising public holding to 35 per cent will lead to a supply of high-quality papers in the market and will provide an excellent opportunity for investors waiting on sidelines for further investment in stocks, says Dinesh Thakkar - CMD, Tradebulls Securities.

The proposal is the biggest wealth-shifting announcement in the interest of ordinary men, says Jimeet Modi, Founder & CEO, Samco Securities.

Transition time to avoid overhang

Market experts believe regulator Sebi must consider giving ample time to promoters to meet new regulations.

"While we need to await SEBI regulations regarding how much time will be given to these companies to meet with this minimum public shareholding norms, the regulator needs to provide sufficient time to meet this requirement so as not to over-flood the markets with stake sales by promoters," says Thunuguntla of Centrum Broking.

Rishabh Shroff, Partner & Co-head, Private Client Practice, Cyril Amarchand Mangaldas agrees. "A staggered multiyear process for the same is required." He believes the proposal will have far-reaching implications on joint ventures.

Dhiraj Relli, MD & CEO, HDFC Securities sees a global advantage for India. "India's weight in MSCI and other global indices could rise following this, leading to benefit over the medium term," he says.

The minimum public shareholding requirement of 25 per cent was introduced in 2010 for all non-public sector undertakings, which were given three years' time to adhere to the new rule. It was made mandatory for public sector undertakings in 2014.

Also Read: Budget 2019: How Nirmala Sitharaman's first Budget will help India become a $5 trillion economy

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