Adding public muscle

It is a truism that a listed company’s stock needs to trade freely on the stock exchanges to aid in price discovery and that this process is impeded if the promoters hold on to most of the shares. The Finance Ministry and the Securities and Exchange Board of India are therefore right in requiring a minimum public shareholding limit in listed companies, for it is the non-promoter shareholders who churn their portfolios with greater frequency. SEBI has also been fair in giving companies three years to increase their non-promoter shareholding and also in providing easier methods for reducing promoter stakes and allowing companies to issue rights or bonus shares to achieve this aim. The regulator has also agreed to consider specific solutions for companies facing special difficulties.

The recent offers for sale have, however, struggled to garner minimum subscription with the Life Insurance Corporation of India bailing out the Government on its stake sale offers in public sector undertakings and promoters of private sector companies offering shares at a discount to market price to attract investors. These debacles point to the need to improve the woeful penetration of equity cult in our country. With most Indians gravitating towards bank deposits and real estate, the equity market has not yet reached the inflexion point that can bring about a dramatic increase in the number of equity investors. The stock exchanges, along with SEBI, should intensify the drive to increase investor awareness in the country to bring long-term funds into the stock market.

These offers for sale are not adding any economic benefit to the companies themselves. Ideally, a reduction in promoters’ holdings should have been achieved through a public issue of capital to fund specific projects, thereby serving the dual purpose of helping a company grow its business while increasing the number of non-promoter shareholders. But the current economic environment and administrative lethargy in disposing of applications for environmental clearances or in the acquisition of land etc. is precluding such a possibility. Until there is an improvement in these parameters and a pick-up in the investment cycle, equity fund raising by India Inc is likely to remain moribund.

While the regulator has set the minimum public shareholding in public sector undertakings at 10 per cent, the limit for all other companies is 25 per cent. This distinction is unwarranted as all listed stocks require adequate free-float that, in turn, leads to greater liquidity. Requiring PSUs to have a lower public holding could affect price discovery in these stocks. Again, a greater proportion of retail and other institutional holdings in PSUs can increase the accountability of the government towards the shareholders in these companies. The recent instance of the Children’s Investment Fund’s protest against the Government directive to Coal India on its pricing is a case in point.

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