Budget proposal to raise public shareholder limit to 35% raises concerns

Move will result in more than 25% listed companies off-loading promoter stakes

PTI7_5_2019_000092B Mayank Jalan (4th left), Chairman and Managing Director of Keventer Agro and Rudra Chatterjee (3rd right), President Indian Chamber of Commerce (ICC) sit along with others to watch the live telecast of Finance Minister Nirmala Sitharaman tabling the Union Budget 2019-20 at ICC's office in Kolkata on Friday | PTI

Finance Minister Nirmala Sitharaman on Friday proposed increasing the minimum shareholding in listed companies to 35 per cent from the existing 25 per cent. The move may lead to more investor participation in equity markets, but there could also be a flood of equity offers in the market as promoters will have to rush to pare their stakes in the companies.

Presenting her maiden budget, Sitharaman said, “it is right time to consider increasing minimum public shareholding in the listed companies. I have asked SEBI to consider raising the current threshold of 25 per cent to 35 per cent.” According to Jagannadham Thunuguntla, senior vice-president at Centrum Broking, there are 1,174 companies with promoter shareholding above 65 per cent. 

“To put it in other words, 25 per cent of the entire universe of listed companies (4,700 companies) will have to go through off-loading promoter stakes to meet this requirement,” he said. Mayuresh Joshi, portfolio manager at Angel Broking, estimates the move to raise public shareholding will roughly add to Rs 3.60 lakh crore of equity hitting the market.

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Many of the multi-national corporations listed in India as well as several small and mid-cap companies have a high promoter shareholding. “Increase in public shareholding is potential negative for MNCs and companies with high promoters holding. In many mid and small-caps, it is better to have more promoter skin in the game, since India’s capital market is in a developing phase,” said Amar Ambani, research head at Yes Securities.

Yogesh Chande, partner at Shardul Amarchand Mangaldas, says increase in minimum level of public shareholding will ensure wider ownership through institutional investors, lead to market depth and could also enhance corporate governance standards. However, it will be a potential concern for companies, including MNCs, with promoter shareholding at around 75 per cent.

“Promoters of such companies may want to explore options to delist such companies, unless they are fine with increasing the public shareholding by another 10 per cent,” said Chande. Furthermore, at 65 per cent promoter shareholding, it will also be an additional hurdle to be crossed by a promoter, if the company was looking to delist from the exchanges, he added.

Thunuguntla said the overhang of this requirement of off-loading of promoter shareholding could have significant impact on the markets and the specific stocks. 

“The regulator needs to provide sufficient time to meet this requirement so as not to over-flood the markets with stake sales by promoters,” he added. If the market regulator was to approve the move, then there could be a flood of offer for sales hitting the market.