The government?s decision to make it mandatory for listed companies to raise public shareholding to 25%, with at least 5% dilution every year, is definitely a well-intended move. However, it would run into implementation hassles. The move will broaden the markets, bring in better corporate governance as more retail investors join the party and so will create more trading in stocks whose movements are often crimped due to low volume. There has, of course, been a sea change in the stock markets already towards this. Data on shareholding patterns of companies filed until 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. Out of these 185 private sector companies, trading was not done at all in about 55 scrips. So, the new regulation is basically following up a good practice already established by shareholder democracy on the floor of the markets. Having said this, going by past experience, it will be a difficult task for companies to implement the new norms as the markets are witnessing a volatile phase because of global cues. Small- and mid-cap companies could opt for delisting if they do not intend to dilute their equity, especially those that are relatively new. In fact, in May 2006, when market regulator Sebi had passed a circular mandating companies to maintain promoter holding below 75% or else had to delist before May 2008, a few companies got themselves delisted from exchanges. The mandated 25% public holding will also be difficult for large companies initially, as they may not want to issue shares at a lower premium only to satisfy the regulatory norms.
Of course, the total dilution is expected to be around Rs 1.5 lakh crore and the bulk of it will be from public sector companies. The biggest question mark that now arises is, do the markets have enough depth to absorb so much more paper and what will be its impact on new issues at a time when foreign institutional investors are pulling out their investments from Indian equities and domestic institutional investors are preferring the debt route? Markets will witness an immediate impact in the near term that was very much visible in the 337 points decline in the benchmark 30-share Sensex on Monday. Despite the tepid response from retail investors to new listings in the last few months, the government expects them to invest far more going ahead. The government must keep in mind that there will be enough room for manipulation and structuring of the shareholding, as some promoters will create offshore entities and hold shares through the offshore account. These loopholes need to be plugged at the earliest.
