The Union finance ministry plans to define any equity placement prior to an Initial Public Offer as promoter shareholding for the purpose of calculating minimum public float. The new definition will be part of an amendment to the Securities Contracts (Regulation) Rules, 1957, that would prescribe a minimum public float of 25 per cent in all companies irrespective of their size or ownership status.
The ministry is likely to come out with the new rules by the end of this month. Post-IPO arrangements between promoters and other equity investors will continue to be treated as public holding.
The ministry is also likely to withdraw the powers of the stock exchanges and the Securities and Exchange Board of India to relax or waive the 25 per cent rule for public sector undertakings and companies in the sectors of information technology (IT), media, entertainment and telecommunications.
Earlier, the ministry had issued a discussion paper on the subject. It had invited suggestions on how the word ‘public’ ought to be defined–whether it should mean non-promoters and whom it should include or exclude. The paper said if ‘public’ meant non-promoters and included foreign investors, foreign institutional investors, mutual funds, employees, non-resident Indians, overseas corporate bodies and private corporate bodies, the floating stock would be insignificant. Currently, any private equity placement before IPO is considered public holding.
According to a recent statement of Crisil Equities, there are 179 listed companies with a public holding of less than 25 per cent. It estimated these companies would raise Rs 1,60,000 crore if they opt for sale of shares and Rs 2,10,000 crore if they plan to dilute their stake via issue of fresh shares.
“Listed companies will be given a schedule (if they do not meet the norm) for diluting 5 per cent stake to public every year. If the public holding falls below 25 per cent after listing, the company will have to bring it back to the same level in six months, against three months as suggested in the discussion paper,” a finance ministry official, who did not want to be named, told Business Standard. Presently, companies not complying with the relevant level or failing to do so at any time are required to rectify the level within two years.
The new rules will also prescribe uniform standards to maintain the minimum 25 per cent public stake. These will apply to all companies and all sectors. “The approach is to have a uniform pattern across the sectors. We do not want to differentiate between private and public or large and small companies,” the official said.
“If large companies like Reliance Industries and Indian Oil Corporation can offer 25 per cent shares to public, there is no rationale in giving a relaxation to IT companies. The idea is to make sure that every company has enough public float, so that there is no price manipulation,” he added.
The norms in India would then be similar to the rules applicable for the London Stock Exchange, where 25 per cent public shareholding is required for both initial and continuous listing. Singapore, Hong Kong and the US have prescribed different public holding requirements in accordance with market capitalisation of companies.
There will be other legal implications of the proposed change. Said Jagannadham Thunuguntla, equity head, SMC Capitals: “If a pre-IPO private equity investment is treated as promoter holding, it will put more obligations on investors because the lock-in period for a major part of promoters’ holding is higher than the lock-in for investors. The other aspect is that when investors are considered as promoters, their responsibility for legal compliance may go up.”
Some experts do not think the change is sensible. Says Prithvi Haldea, CMD, Prime Database: “PSUs are finding it difficult to offload even 5 to 10 per cent. The government should make an exemption for PSUs and large companies. There is not enough market.”