An enabler for big unlisted firms

By CKG Nair

The minimum public offer (MPO) and the minimum public shareholding (MPS) norms are seeing yet another round of interesting changes. One of the important regulatory-policy steps taken by the Securities and Exchange Board of India (Sebi) board on September 12 is to go for a fine, granular calibration of these norms. Both the minimum offer in the initial public offering (IPO) and the time frame for eventually reaching the 25% level have been relaxed considerably for companies with high market capitalisation, post-IPO. However, the new norms are only Sebi’s recommendations to the ministry of finance which has to notify them as amendments to the Securities Contract (Regulation) Rules, 1957 (SCRR), in order to be effective.

A tiered framework for large companies

There is no change in existing norms for small- and medium-cap companies up to a post-issue market capitalisation of Rs 50,000 crore. Companies above this threshold are split into three categories: Rs 50,000-1 lakh crore; Rs 1-5 lakh crore; and more than Rs 5 lakh crore market capitalisation post-IPO.

For category 1, the MPO has to be the higher than Rs 1,000 crore or 8% of the post-issue market capitalisation; for category 2, Rs 6,250 crore (2.75% of post-issue market capitalisation); for category 3, Rs 15,000 crore and at least 1% of the post-issue market capitalisation, subject to a minimum dilution of 2.5% equity. The time frame for reaching MPS of 25% in all these categories also has been revised upwards, broadly from three/five years to five/10 years.

Clearly, Sebi’s proposals are enablers for the big unlisted companies, reportedly waiting in the wings to enter the public market. It is up to the issuers to decide the ceiling of their IPOs. Sebi has also, rightly, taken the rule-based route to effecting these changes, rather than using its discretionary power of providing case-by-case exemption. And, hopefully, when notified by the finance ministry, ownership neutrality—a missing but much needed policy-regulatory norm—too will be restored.

Historical shifts and global context

The initial public issue/holding norms in India have had a “secular decline” over the years; a rapid fall initially, followed by gradual but volatile decline. The norm was up to 60% of the issued capital for most companies before September 20, 1993, when it was reduced to 25%. During the information technology boom and with the emergence of big IT companies, relaxations (MPO of 10%) for such companies were provided in 1999. Similar relaxations were extended to media, entertainment, and telecom companies in April 2000.

However, with the rapidly growing importance of the securities market as a major vehicle for mobilising capital, widening and deepening the market with a sizeable public float for all listed/intending companies was considered essential. The finance ministry simplified and notified the public issue/holding norms in June 2010. Accordingly, all companies had to reach 25% public (non-promoter) holding; those with less than Rs 4,000 crore market capitalisation on IPO and for those above that level within three years from the IPO with a minimum 10% issue. For existing companies falling short of the 25% level, a three-year time frame was also given to reach the minimum 25%.

While the simplified, standardised norms also aimed to achieve ownership neutrality, concerns about more than a dozen public sector undertakings (PSUs) having to go for quick follow-on public offers (FPOs) restored a 10% norm for PSUs of all sizes. After various amendments to SCRR, these norms got further diluted, both for private and private sector firms. PSUs, however, got the maximum flexibility, which allowed LIC to list by diluting only 3.5% of government shareholding in May 2022.

There have been several large public issues in other countries; but only one, ARAMCO, with very small 1.73% of market capitalisation—still by far the largest ever IPO in the world. Other large IPOs include Alibaba ($21.7 billion, 2014, 13%]; Softbank Corporation, ($21.3 billion, 2018, 33%); NTT Mobile ($18.1 billion, 1987, 13%); and Facebook, ($16.01 billion, 2012, 15%). All these big IPOs were at least 13% of the post-issue market capitalisation. ARAMCO is a special case with market capitalisation averaging about 120% of the GDP of Saudi Arabia, with no parallel.

There are few Indian companies of such magnitudes. However, there are a few with reportedly large market cap (Jio Communications, NSE, Tata Capital). Is the dilution in norms in tune with the current stature of the Indian economy, its much acclaimed growth potential, and the rapid rise of investors? Are the public offer/holding norms swimming against the current? At $4.2 trillion, India is the fourth-largest economy aiming to capture the third spot. Don’t these statistics convey that well-governed companies should have no difficulty in raising public capital of substantial amounts? A strong pointer to this capability is the strong data on over-subscription of IPOs (very often multiple times the offer size even during a beeline of IPOs). For instance, on the day the Sebi board approved the new norms Urban Company’s IPO was reportedly oversubscribed 104 times. That is Rs 1.97 lakh crore blocked for an IPO of just Rs 1,900 crore.