Budget 2019: What A 35% Public Float Would Mean For India Inc.

The finance minister said an increase in minimum public shareholding will deepen the markets and enable wider participation.

A road block. (Photographer: Stephen Shaver/Bloomberg News)
A road block. (Photographer: Stephen Shaver/Bloomberg News)

India plans to consider increasing the threshold of minimum public shareholding, forcing promoters to pare stake.

“It is right time to consider increasing the minimum public shareholding in the listed companies” and the government is in talks with the Securities and Exchange Board of India to raise the threshold from 25 percent to 35 percent,” Finance Minister Nirmala Sitharaman said in her maiden budget speech. The idea, she said, was to deepen the markets and enable wider participation.

An increase in the minimum public float will improve governance as well as enhance liquidity and improve market integrity, Manan Lahoty, partner at L&L Partners, told BloombergQuint. “It will allow institutional investors to take larger positions, which will boost inflows from foreign investors.”

This isn’t the first time the threshold will be raised. Nearly a decade ago, SEBI had increased the minimum public float to 25 percent from 15 and 10 percent. And it brought the state-run companies within its purview in 2014. Still, 49 percent of the government-owned companies are yet to comply, according to data compiled by BloombergQuint.

“Historically speaking, India has been a promoter-driven market,” Yogesh Chande, a partner at Shardul Amarchand Mangaldas & Co, said. “Increasing the threshold will ensure wider ownership through institutional investors, more market depth, better price discovery and hopefully will enhance the corporate governance standards.”

The last time, the move had triggered share sales worth at least $1 billion in June 2013, Bloomberg reported. This time, it may lead to equity sales worth about Rs 3.9 lakh crore ($57 billion), creating a supply overhang in the market trading near record high, the report said quoting analysts from Centrum Broking Pvt., Tata Consultancy Services Ltd. and Hindustan Unilever Ltd. are among at least 100 Indian companies that may have to sell shares to increase public float if the move is implemented, the report said.

Chande, however, also sees the move as a potential concern for listed companies with promoter shareholding at around 75 percent, including multinationals. “Unless the promoters are acceptable to a dilution, they may want to explore options to delist such companies. At 65 percent promoter shareholding, it will be a procedural challenge to attempt delisting.”

Is Compliance Possible?

Lahoty said the increase in public float to 35 percent should be possible provided the framework allows adequate time. As capital markets can be choppy and the windows are narrow, this could still be a challenge, he said.

He also pointed to a deviation from global norms. “For most major economies, the minimum public shareholding requirement is 10-15 percent. In a way, we are going beyond the global norms,” he said.

But this might be justified in India, since larger proportion of companies which are listed or contemplating IPO are promoter-driven companies, as opposed to the professionally managed companies or companies with marginal promoter shareholding in other economies.
Manan Lahoty, Partner, L&L Partners

Still, an increasingly large proportion of companies in India in the recent past have had higher private equity investments than before, he said. The pain of adhering to these requirements will be lower this time, he said.

Tax Fallout

This change is likely to impact some promoters who will be forced to dispose part of their holding, leading to long-term capital gains in their hands, said Ameet Patel, partner at Manohar Chowdhry & Associates. “They will have to pay tax at 10 percent plus increased surcharge of up to 37 percent, which effectively would take the (long-term capital gains) tax rate to 14 percent.”

The companies will also have an option to raise equity capital by issuing new shares, diluting promoter shareholding.

Lahoty, however, said the move is not so much a fiscal measure as it is a policy announcement for developing and regulating capital markets.

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