Uniform public float can check price manipulation

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: The ministry of finance recently issued a discussion paper imposing a uniform public float limit of 25%. The key rationale seems to be that the distribution of a large number of shares among a big number of shareholders is crucial for the sustenance of a continuous market for listed securities to provide liquidity for investors and also pave the way for fair price discovery. The assumption is that a large public float will provide adequate liquidity for investors.

The move is being deliberated in corporate circles and companies are closely scrutinizing its impact. From a capital market perspective there are two key time periods during which determination of public shareholding becomes important - the time when the company goes for initial listing and the period during which it remains continuously listed on the stock exchanges.

Legal stipulation

Rule 19(2) (b) of the Securities Contracts (Regulation) Rules, 1957 (SCRR) provides that at least 25% of a company’s securities shall be offered for listing at the time of its initial public offering. However, this number can be reduced to 10% subject to fulfillment of any of the following three conditions: (i) Minimum offer is for 20 lakh securities, (ii) size of the offer is a minimum of Rs. 100 crore, and (iii) the issue is undertaken through the book building process with allocation of 60% of the issue to qualified institutional buyers. Compliance with any of the three conditions is mandatory.

Listing requirement

Once listed on the stock exchanges, as per the stipulated legal guidelines companies are required to maintain a minimum public float during the period of listing. This comes under the purview of the provisions of the listing agreement that companies enter into with stock exchanges. Clause 40A of the listing agreement provides that listed companies shall maintain a public float of 25%. However, this number may be reduced to 10% in case of fulfillment of any of these three conditions (i) a company has offered at least 10% shares to the public (but less than 25%), or (ii) a company has more than 2 crore shares outstanding and (iii) its market capitalization is at least Rs 1,000 crore.

Finance ministry notification