A primary boost

The Securities and Exchange Board of India’s latest measures to resuscitate the primary market couldn’t have been better timed. Mandating a 25 per cent minimum public shareholding in listed state-owned firms (as against the existing 10 per cent), allowing the top 200 companies by market capitalisation to make offers-for-sale through stock exchanges (a facility now limited to the top 100), and reserving 10 per cent of the issue size through this route for retail investors who will also be eligible for price discounts are all welcome in the current context. At a time when the secondary market is doing well — notwithstanding Iraq and El Nino — SEBI’s actions will help increase the supply of quality paper, encourage companies to raise monies and lead to greater retail investor participation. These could also have a virtuous impact — empirical evidence suggests new investors rush in when the primary market is robust and there is a deluge of attractive offers.

No less significant is the boost the Centre’s disinvestment programme will get from SEBI’s announcements. Currently, as many as 36 listed public sector undertakings (PSUs) have below 25 per cent public shareholding. Most of these are good companies enjoying a monopoly status or a dominant domestic market share in their respective sectors. The fact that the Centre’s stake in them has to be brought down to 75 per cent in the next three years means investors aren’t going to be starved of quality paper from at least one source. Besides, SEBI has permitted non-promoters who own at least 10 per cent shares to offload their holdings through offers-for-sale via stock exchanges. The Centre — or, for that matter, Life Insurance Corporation and other public financial institutions — can use this to shed even its residual stakes in companies such as Hindustan Zinc.

The Indian economy today is investment starved. By facilitating disinvestment, SEBI has created an avenue for the Centre to mop up large resources that can, in turn, be deployed towards productive capital expenditure and kick-starting investment activity. Thankfully, there is market appetite now for both PSU stocks as well as IPOs of companies with good managements and sound business models. Equally important is the need to widen the investor base in Indian equity markets which have lately become the preserve of foreign institutional investors. FIIs, in fact, have the largest shareholding in listed Indian companies after the promoters themselves. SEBI’s earlier move to increase retail holding by laying down the minimum public shareholding limit of 25 per cent in listed non-government companies has not really worked. Although promoters’ holdings have come down by around 5 per cent in the last two years, it is only the stakes of FIIs that have risen correspondingly during this period. Holdings of retail investors and domestic institutions have remained the same, if not fallen. This will hopefully now change with the latest reforms.

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