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Updated: Jan 26 2005, 05:30am hrs
The Securities and Exchange Board of Indias (Sebi) move to restrict the increase in promoter holding in listed companies by way of takeovers, preferential allotments and creeping acquisition to 55% is an important and long overdue decision. Many blue-chip companies in India, which attract maximum investor interest, have a public shareholding (including institutional shareholding) of less than 20%. The sustained bull market (despite the recent correction) of 2004 has forced Sebi to dust down and improve on a 2002 recommendation that continuous listing norms must be strictly adhered to. The listing conditions require non-promoter shareholding to be at the level of 25% or 10% (depending on the applicable rules). But these often came into conflict with takeover regulations, which allowed promoter holding to go up to 90% before triggering delisting rules, and allowed such holdings to rise to 75% through creeping acquisition. Sebi has done well to harmonise the rules and expand these further to bring the public back into public limited companies.

Under the new rules, effective December 30, 2004, promoters cannot enhance their stake beyond 55% through creeping acquisitions. Any stake beyond that level has to be divested through an offer for sale. Creeping acquisition allowed promoters to hike their shareholding by 2% every year through open market purchases. Under the new Sebi rules, companies wanting to delist their shares will find the reverse book-building procedure is triggered when the promoter holding touches 75%, rather than 90%. This, too, is a positive development. The chance of a fairer price realisation is enhanced when a larger base of investors is involved in the reverse book-building process to decide the delisting price.

In many ways, this move by Sebi is part of a long process to roll back some of the mischief of the 1995-2000 period, when corporate India repeatedly succeeded in changing the rules covering corporate takeovers, preferential allotments, creeping acquisition and IPOs, until the system was loaded against public shareholders. This time, too, companies and investment bankers are bound to protest the regulators decision and disgruntled noises have already appeared in the media. Sebi must, however, hold firm and not succumb to corporate pressure, because an expansion of non-promoter holding is extremely important for an illiquid market like ours.