All you wanted to know about MPS rule

The latest deal between the estranged Ambani brothers, where Reliance Industries will buy out telecom assets of RCom, may have made you feel that promoters call all the shots at listed companies.

Well, you’re not alone. Market regulator SEBI thinks so too. It has been trying to snip the apron strings that tie publicly listed companies to their promoters, through its Minimum Public Shareholding (MPS) rule. Last week, it allowed companies to use two new methods of share sales to comply with the MPS rule.

The Minimum Public Shareholding rule requires all listed companies in India to ensure that at least 25 per cent of their equity shares are held by non-promoters. In 2010, SEBI amended the Securities Contracts Regulation Rules to insist on this 25 per cent public float for private sector companies. Promoters with a strangle-hold on listed companies were asked to compulsorily sell down their stake by making a follow-on offer, putting through an offer for sale, placing shares with institutions or issuing rights or bonus shares by June 2013.

PSUs were allowed a 10 per cent MPS, but have recently been asked to comply with a 25 per cent MPS by August 2018. But a review by SEBI in June 2013 found that over 105 private sector firms hadn’t fallen in line and it issued notices to them. Four years on, a few of them are yet to move to the 25 per cent public holding. But the regulator is said to be keen to further expand the mandatory MPS to 30 per cent or even 35 per cent.

To outsiders, India has a vast ocean-like listed universe with of 5000 listed companies. But seasoned investors will tell you that the market depth is very low. That is, stocks beyond the top 150 or 200 feature thin trading and carry high impact cost if you buy or sell large quantities. One reason for this is high promoter holdings where the float available for trading by the public is very limited. SEBI is hoping to improve market depth and liquidity by unlocking this free float.

Two, forcing promoter to relax their grip on listed companies can improve corporate governance by giving public shareholders and institutions greater say in corporate actions that are put to vote.

Three, with domestic money flooding into the Indian stock market lately, money managers are bemoaning the lack of investment opportunities for all this liquidity. Yes, IPOs from private companies can absorb some of the money. But forcing promoters to sell shares can also improve the supply of shares.

As an investor in shares, mutual funds or market-linked pension funds, you should welcome the MPS rule as it ensures better liquidity, price discovery and governance in the stock market. Should SEBI decide to insist on an even higher free float, you should look forward to more follow-on offers, offers for sale and rights offers from the well-known names on the bourses.

If you directly dabble in shares, you should check on the public shareholding of the companies you own, to ensure that they comply with the MPS rule. If your company is non-complaint, it is in the firing line for penalties from SEBI and stock exchanges. Last October, SEBI asked stock exchanges to impose a fine of ₹5,000/10,000 per day, freeze the promoter shares and bar promoters from any directorships, if a listed company didn’t meet the 25-per cent public holding rule. Such companies can be asked to delist.

It’s good to let go, especially if you’re the promoter of a listed company.

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