The changes in the Securities Contracts (Regulation) Rules will not only create a huge supply of fresh papers in the current fiscal but will also impact the pricing of the large public issues such as Coal India and BSNL.  The amendments will also bring the Indian promoters of insurance joint ventures legally at par with their foreign counterpart, as their (Indian promoters) stake will come down to 49% after listing from the current 74% level. As per current laws, the investors holding 49% stake enjoy similar rights to those who hold 26%.

Since listing is mandatory for both life and general insurers after 10 years of inception and foreign partners are unlikely to dilute their ownership below 26%, Indian promoters will be left with no option but to bring down their holding.

On Friday, the government had come out with detailed guidelines for a minimum public float of 25%. It has further stipulated that if any company has a market cap of over Rs 4,000 crore, it will be allowed to go public with 10% public shareholding. However, such companies will have to comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum.

This in effect means that at the time of doing public issue of 10% of Coal India, for which government has appointed six investment bankers, the government (promoters of Coal India) will tell the potential investors that follow on offers of 5% each will come for the next three years to comply with the new amendment.

“This will create a supply hangover and adversely impact the pricing of the issue,” said an investment banker involved in the deal. “Why will one buy in the first year when he knows that next year the company will come out with another round of issue,” he questioned.

However, bankers are skeptical of implementing the new changes. Similar guidelines were issued by the market regulator Securities and Exchange Board of India (Sebi) in May 2006. Sebi had passed a circular mentioning the guidelines for stocks listed on exchanges. Companies under this circular (Clause 40A) had to maintain promoter holding below 75% else they had to delist before May 2008.

A few companies preferred the de-listing option and the process of de-listing still continues. However, they haven’t been able to achieve any major success, said a senior official in the market regulator.

The new guidelines will create a level-playing field for every one, said Ravi Sardana, senior vice-president at ICICI Securities. “The large public shareholding will help in more price stability,” he said.

A senior official of an insurance joint venture, which is completing 10 years of incorporation next year, said that the new amendments will effectively bring down the stakes of Indian promoters to 49% as no foreign partners are ready to dilute their holding from the existing level of 26%.

As per a report on the shareholding pattern of publicly listed firms collated by securities research firm Edelweiss, 156 companies have promoter holding of more than 75%. Under the new norms, the total dilution from these companies are expected to the extent of Rs 1.5 lakh crore in the next five years, with minimum dilution of 5% annually. Of this, around Rs 1 lakh crore will be contributed by just eight state-owned firms.


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