The Hindu Business Line : Undesirable exemptions

Promoters of companies have gained considerably by listing, and there is no reason why they should not offer a larger share of the benefits to investors at large.

The minimum public shareholding norm required for continuous listing that comes into force from May 1 should have, in the normal course, been a huge positive for the equity market. The Securities and Exchange Board of India had prescribed a minimum public shareholding of at least 25 per cent for a listed company. As several quality large- and mid-cap companies have public shareholding of less than this, it was expected that over time, the promoters would dilute their holdings to comply with the norm. Such an exercise would have enhanced the already rising depth in the equity market; it would have also further increased the attractiveness of India for Foreign Institutional Investors. As domestic investors have also begun to step up the share of household savings deployed in equities, they would have also benefited from the move.

Unfortunately, even as SEBI notified the date for compliance last week, it has announced a list of exemptions that undermine the positive effect of the norm. Especially undesirable is the exemption granted to companies with a minimum floating stock of 10 per cent as well as to those with a market capitalisation of Rs 1,000 crore. In one fell swoop, these exemptions take a sizeable number of large-cap, mid-cap and a large proportion of small-cap stocks out of the purview. Promoters of these companies have gained considerably by listing, and there is no reason why they should not offer a larger share of the benefits to investors at large. Doing so will also lead to superior price discovery and take the scarcity premium, due to low floating stock, out of the valuation equation. The exemption granted to infrastructure companies is also baffling. Across sectors, one would expect companies in this space to need the largest quantum of capital and there would have been no better way of achieving this than offering a 25-per cent stake to the public. Only the exemption granted to government-owned companies makes sense due to legislative requirements, though SEBI could have stipulated a longer time-frame of five years for such players to comply.

SEBI needs to rethink the issue. Perhaps the threshold could be lowered to 20 per cent, as it will remove any apprehension that promoters may have about their ability to steer through special resolutions (they could do so even with just 75 per cent) and enhance their comfort level with the listed status. All companies that do not comply with this level could be a given a one/three-year period, depending on levels of market capitalisation, to adhere to the norm. SEBI could also use a phased approach, which it used with telling effect to make a success of dematerialisation five years ago. Such a course will preserve the spirit of the concept and advance the process of market development, a key mandate for SEBI.

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