The government on Friday announced the biggest reform in the Indian capital markets yet, mandating listed companies and those wanting to list on the stock exchanges to have a minimum public shareholding of 25%, as against 10% at present.

Listed companies having less than 25% public float will be required to reach this level by diluting at least 5% stock annually. The proposal would result in a mop-up of over Rs 1,60,000 crore from the primary market by the 179 listed companies with less than 25% public float, according to a report by Crisil Equities. In the next one year itself, these companies will have to raise Rs 60,000 crore to comply with the new policy.

NTPC, Nalco, SAIL, DLF, Wipro and Reliance Power are among companies which need to increase public float. About 82% of the estimated funds is likely to be raised by 29 listed government entities .

The new policy is expected to increase liquidity in the stocks of listed companies and make price discovery more robust and transparent. It would also reduce incidences of over-subscription in IPOs usually witnessed during bull runs. Higher public float is also seen as less prone to price manipulation.

The finance ministry notified amendments to this effect in the Securities Contracts (Regulation) Rules. The ministry statement said that a company planning to list on an exchange would have to dilute 25% at one go in case the issue size is up to Rs 4,000 crore.

However, if the company’s post-issue capital calculated at offer price is more than Rs 4,000 crore, it might be allowed to go public with 10% and later comply with the 25% requirement by increasing its public shareholding by at least 5% per annum. Companies that are already in the process of going public could disinvest 10% now and meet 25% criteria later. Also, a company may increase its public float by less than 5% in a year if it brings its public stake to 25% in that year.

?If the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall,? it said.

Over the past six years, companies have raised an average of Rs 50,000-55,000 crore each year through equity issues, including initial public offers. ?The market would be able to digest the additional offers resulting from the new policy given that a large portion of it is going to be done by PSUs, where investors would have a fairly good interest,? said Tarun Bhatia, director, capital markets, Crisil Research.

Based on the current market price and the extent of promoter holding, it is estimated that these companies would raise Rs 1,60,000 crore if they opt for sale of shares and Rs 2,10,000 crore if they plan to dilute their stake by issuing fresh shares, Crisil Research said.

?On Monday, there could be an impact of the government’s move on large-cap companies which will have to come out with big issuances. The biggest advantage is for the investors in terms of price discovery because if there is more liquidity the price discovery is more transparent,? Bhatia said. ?The average public float in Indian listed companies is less than 15%. Deep, non-manipulable markets require larger and diversified public shareholdings,? the finance minister had said in his budget speech while announcing the proposal to raise the minimum public float. ?This requirement should be uniformly applied to the private sector as well as listed PSUs. I propose to raise, in a phased manner, the threshold for non-promoter public shareholding for all listed companies,? he had said.