The finance ministry?s decision, to put the 25% minimum public float norms for state-owned companies on hold, will clearly discriminate against private sector companies. The public sector companies have argued that they are in no position to raise more money, given the tepid response from retail investors to some of the recent public offerings. The government should now revisit the notification to raise the minimum threshold level of public holding at 25% for all listed companies and they must be given a longer time frame to meet the threshold. This would mitigate the supply issue of paper in the markets. The timing of dilution of stocks should be determined by the management of the company and its needs for funds, rather than forcing 5% dilution each year. This will also provide an opportunity to companies to get fair valuations and those floating initial public offering could see greater investor participation. As we have argued in the past, the well-intended move by the government has been incorrectly timed as the markets are seeing a lot of volatility. The total dilution is expected to be around Rs 1.5 lakh crore and the markets simply do not have the appetite to absorb so much paper in the near and medium term. Data on share holding patterns of companies filed till March 31, 2010 show that out of 3,467 listed companies in BSE, there were only 185 private sector companies and 36 public sector companies in which promoters hold more than 75% of the shares.
The 25% free float for public sector companies is more desirable, given the fact these companies have a weight of 15.7% in the Nifty index. The increased float will raise their weight in benchmark indices and will help them attract more money. But everything hinges on sound valuations and strong fundamentals of the companies. Now, public sector companies going for listing will sell their shares as per the earlier norms, before the amendment in the Securities Contract Regulations Act. Under the new public float norms, retail investors will have a wider choice and they might dilute their stake in one company and move towards others, which will affect the price-earnings multiple of the company. In fact, data shows that some 35 companies have received clearance from Sebi for IPOs but are not confident enough to hit the markets because of the volatility. The public float norms, aimed at large public participation in the markets, must ensure effective price discovery because effective price discovery is an equally important objective.
