More shares in public hand — Is that a good or a bad proposal?

Chennai | Updated on July 26, 2019 Published on July 26, 2019

One of the proposals in the recent Union Budget presented by Nirmala Sitharaman has kicked up a lot of debate in the investor fraternity.

Presenting her maiden Union Budget, Sitharaman said, “The time is right to consider increasing minimum public shareholding from 25 per cent to 35 per cent,” for listed companies. “The government has already written to SEBI regarding the matter,” she added.

Ever since the announcement was made, analysts and market insiders are divided on the issue.

Pros: Those who advocate more public holding say that this will enhance liquidity, which is very good for retail investors to cash in or cash out any time they want.

The move will help the public (including foreign portfolio investors, mutual funds, insurance companies, high net worth individuals and retail investors) have more say in decision-making and thus, improve corporate governance.

It will enhance the price discovery of a stock. As price discovery is on the basis of demand and supply, more public float may capture the real value of the security.

Also, this move would help large domestic investors, such as EPFO fund, insurance companies and mutual funds deploy their inflows better by accumulating more quality stocks in their portfolios.

Cons: However, those who are against the move, feel that in the short term it would suck out liquidity at the bourses, as many would cash out from a large number of mid- and small-cap stocks to buy large-caps. This will result in a further downtrend in mid/small-cap stocks that are already being hammered by bears.

Also, raising the minimum public shareholding will push several MNCs and information technology companies, to delist. As many of these companies are closely-managed businesses, they would prefer to delist than to part with more shares to the public. Such an extreme step (delisting) would deprive retail and domestic investors of the opportunity to own world-class companies, however small in terms of quantity.

There is also the issue of promoters’ pride in their companies, as owners. The aggressive trait of promoters is an important asset to any company. Some fear that the aggressive trait may see a compromise if the sense of belonging is reduced, which would affect the overall growth of the company.

According to rough estimates, there are over 1,250 companies where promoters’ shareholding is more than 65 per cent. These companies, which include TCS, Wipro and Avenue Supermarts, will have to offload shares worth ₹4-lakh crore. It would take a very long time for promoters to offload such a large quantity of shares given the market conditions. For that, one would need strong primary and secondary market segments.

Therefore, in interest of the Indian capital market which is still in the developing stage, it would be best to engage in a wider debate involving all the stakeholders -- promoters, SEBI, exchanges and brokers -- on this vital proposal, than to rush it through.

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Published on July 26, 2019
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