Listed companies must have 25% public float

Mandatory 25% public holding for stock exchange listing has been enacted to curb stock price manipulation after years of debate, a rule that may trigger $34-billion share sales from companies such as Wipro, MMTC and Reliance Power. But the absence of a penalty clause for non-compliance may make the change ineffective. The implementation of the rule will be gradual, with companies having less than 25% float getting to sell at least 5% each year to attain the mandated level, said a finance ministry statement.

Those planning an initial public offering, or IPO, can sell just 10% of the company, provided it gets a market value of Rs 4,000 crore. But they have to raise it to 25% gradually, a provision that analysts say may have been done with an eye on the planned share sale of state-run companies. A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to investors and to discover fair prices, said the statement. The larger the number of shareholders, the less is the scope for price manipulation. 

The rule is a return to the position a decade ago before it was eased to 10% to feed the demands of companies in the technology and telecom sectors and extended to infrastructure, when these fads were running their course. The low floats led to inflated valuations of companies at the time of IPOs and ended in tears for many investors. Low stock supply also led to manipulation of prices in the secondary market.

Deep non-manipulable markets require larger and diversified public shareholdings, finance minister Pranab Mukherjee said last July. This requirement should be uniformly applied to the private sector as well as listed public sector companies. There are at least 179 companies listed on the stock exchanges where the float is less than 25%,Crisil Equities estimates. At current prices, these firms may have to raise Rs 1.6 lakh crore if promoters sell their holdings, nearly double the funds raised via share sales in fiscal 2010.If they attempt to achieve the 25% limit through sale of new shares, they may raise Rs 2.1 lakh crore, it says.

The biggest chunk of sale may come from the government through disinvestment in companies such as Hindustan Copper and trading firm MMTC, which have less than 1% traded on the stock exchanges. Crisil estimates show that 82% of the expected funds may be raised by public sector companies. The share sale may reduce the valuations of these companies to reasonable levels like it compressed the price-to-earnings multiple of miner NMDC after a follow-on offer this year.

Economic Times, New Delhi, 05-06-2010