The new rule that makes it mandatory for all listed companies to increase public float to 25% in three years might have been aptly timed ? after the bourses? closure ? to let the market digest the news over the weekend. However, Monday morning could have its share of blues in store for companies who have lots to catch up. ?On Monday, there could be an impact on large-cap companies that now have to make big issuances,? says Tarun Bhatia, director (capital markets), Crisil Research.
Experts also warn about the flipside of such a huge of issues hitting the market ? a wider choice might make investors dilute their stake in one company and move towards others. ?While wider participation from the public would improve corporate governance. Since investors would have more choice, they might liquidate their current holdings and gravitate towards ?aspirational? stocks,? says VR Srinivasan, CEO, Brics Securities. He said it has been seen in the past that price earning multiple usually falls for companies increasing public float.
Following Friday?s announcement, prominent PSUs like MMTC, NMDC, NTPC and Hindustan Copper and private majors like Wipro, Reliance Power, Essar Oil and DLF have to improve their free float to a large extent. The public shareholding component could be increased either by way of promoters offering their stakes or in the form of further issue of shares. Analysts are worried about the second possibility in particular, since that could reduce earning per share and overall valuations of the companies. ?Cash in the balance sheet has to be utilised efficiently in business projects if the return on equity has to remain intact,? says an analyst with a brokerage house who didn?t want to be named.
Another worry is whether the increase in these issuances could crowd out the market. According to FE estimates, at least Rs 50,000-crore of such issuances would hit the market in the next year itself.
While one could argue these offerings would generate a lot of interest given that they would be from big PSUs, the challenge is also that the figure is almost equal to the annual FII equity investments into the country. The issuances are also likely to change the Sensex composition over the next three years. Whether that is good or bad, is a million dollar question. Says Saurabh Nanavati, CEO, Religare Mutual Fund, ?Investors should not get worried regarding the larger float absorption in PSU companies because given the quality of these companies, index weightages will readjust and increase PSU stock weightages in the Sensex, Nifty and other indices. This will force FIIs, portfolio managers and ETFs to shift their holdings to these PSU companies from private sector companies.? It is likely that some of the above companies will also find its way into global indices and improve weightage for India, given that the free float method of giving weightages for indices is common across the world.
According to an FE analysis, there are nine non-Sensex companies, including MMTC, NMDC, IOC, SAIL, PowerGrid, which could have free float market capitalisation higher than that of ACC ? a Sensex company with the lowest free-float market capitalisation (Rs 8682 crore) ? if it were to raise its public float to 25% today. While inclusion of these companies in the index is dependant on various factors like the relative price trajectory over the next few years vis-a-vis Sensex companies, actual issuances and trade volumes, there is strong likelihood that these companies would enter mainstream indices like Sensex or Nifty in the medium term. At present, finance companies on the Sensex have 22.8% weightage, followed by oil and gas at 17.7%, infotech at 14.8% and capital goods at 9.8%. The share of metals (and mining) and power is relatively lesser at 7.6% and 5.2%, respectively. It is likely in the next three years, the share of metals and power could increase with higher free float of companies like MMTC, NMDC, SAIL, Powergrid, Hind Copper, Reliance Power and NHPC.