The expert committee, appointed by the Supreme Court (SC) to check if there were any regulatory failure on part of SEBI with regard to the probe of Adani Group, has labelled the rules surrounding maintenance of minimum public shareholding (MMPS) in listed companies “having a chequered history” that were subject to frequent and repeated changes.

According to the committee, SEBI’s temptation to treat public sector undertakings differently has also left its imprint on the provisions.

SEBI’s MMPS rules specify the minimum float that listed companies should have. Currently, the rules suggest promoters should hold not more than 75 per cent stake in a listed company and the rest should be public float. Hindenburg had alleged Adani had circumvented SEBI’s minimum public shareholding norms by way of round tripping and using certain FPIs as front.

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“Even a plain reading would show that rule 19A was introduced in June 2010 and all along has been subject to frequent and repeated amendments. From a regime of having to maintain a very high mandatory public shareholding, to a regime where different companies had different standards to meet to remain compliant, to a regime where all companies by and large comply with a common standard, the law governing minimum public shareholding has truly had a chequered history,” the committee said.

How it all started

When India introduced exchange controls and forced multinationals to list their subsidiaries in India in the 1970s, promoter stake was to be kept at 40 per cent, with minimum public offers of 60 per cent being mandated by law. This changed when India opened up in the 1990s. Suffice it to say that the first serious reform towards the current regime took place in August 2005. SEBI introduced a policy change, which was well-intentioned, but created multiple classes of companies with varying public shareholding. 

However, since Rule 19(2)(b) permitted making a public offer with just 10 per cent offer to the public, such companies would be compliant if they maintained a minimum public shareholding of l0 per cent. Government companies, infrastructure companies and sick industrial companies were exempt from minimum public shareholding requirements. 

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In 2005, SEBI had indicated that the ultimate objective is to reach a single level of minimum public shareholding for all, but did not stipulate an eventual time-frame for reaching this objective.

It was on June 4, 2010, that Rule 19A was introduced into the SCRR. From this stage, two instruments of law dealt with minimum public shareholding — the listing agreement to be executed with stock exchanges. Originally different companies had different standards to comply with, and that was eventually streamlined to every listed company having to comply with a 25 per cent minimum public shareholding. Time was given to companies to adhere to the new standard and there has been suspicion that many promoters of corporates would be prone to strike deals with friends and family to hold shares on their behalf and take on the role or “public shareholders“, but given the influence or control over them, such holding was suspected as not being truly public shareholding.

“Therefore, since public shareholding is about the ability of a shareholder to decide for himself to trade in the shares without reference to the promoter and without strings attached to the promoter, the vexed question is to see who can actually take decisions on what to do with the shares,” the committee said in its report.