Increased public shareholding norm may hit companies planning IPOs
Sebi to decide the deadline for meeting the norm but market participants are clearly edgy.
This could be more so if market regulator Sebi gives less than three years to the companies to comply with the revised limit, said experts.
They said large share offerings to reduce promoters’ maximum shareholding to 65 per cent in their companies could diminish investor appetite for IPOs, which have largely underperformed the market in the past 10 years. This division in flows could happen more in the case of smaller companies and small-sized IPOs, said the experts. NSE, HDB Financial, Reliance Retail and Reliance Jio are some of the well-known companies that are likely to go public in the next 1-2 years, according to investment bankers.
Finance minister Nirmala Sitharaman said in her maiden budget speech on Friday that the government has recommended to Sebi to increase the minimum public shareholding limit to 35 per cent from 25 per cent currently.
According to some estimates, 25 per cent of the 4,700 listed companies will have to offload promoter stakes to meet this requirement, which amounts to nearly Rs 4 lakh crore of equity supply.
It is up to Sebi to decide on the deadline for meeting the norm but market participants are clearly edgy.
“Whether the market will be able to absorb this will depend on the timeline...However, the IPO market could get impacted if there is bunching up," said Harsha Upadhyaya, chief investment officer - equity, Kotak Mahindra Asset Management Company.
The uncertainty over the time that companies could be given, if and when the recommendation is implemented, caused benchmark stock indices to end 1 per cent lower and there could be more nervousness in the coming days.
Analysts said this massive quantity of stock supply could hit the domestic equity market, and would include companies such as Tata Consultancy Services, Wipro and Avenue Supermarts among others, which are likely to attract both foreign and domestic investors’ interest. The quantum of sale by IT major TCS itself would amount to nearly Rs 59,000 crore as per analyst estimates, which is more than the amount raised by companies through IPOs last year.
This could split their interest between subscribing to the increased supply in the market and new issues.
"It depends on how the rules are framed. Even if it comes up in 3-4 years, it is still quite a large supply," said Girish Nadkarni, managing director, Motilal Oswal Investment Banking.
The absorption of this equity supply also hinges on foreign and domestic flows. While experts did not give estimates for likely flows in the coming years, it is worth noting that India's largest insurer LIC typically puts in about Rs 40,000 crore to Rs 60,000 crore in equity investments every year. Mutual fund flows averaged nearly Rs 50,000 crore per year between 2014 and 2016 and were above Rs 1 lakh crore in 2017 and 2018. So far this year, mutual funds have pumped in Rs 13,200 crore.
In 2018, 27 companies hit the IPO market to collectively raise Rs 30,959 crore, and in 2017, 36 companies raised a total of Rs 67,147 crore through IPOs, according to PRIME Database. So far in 2019 (till June), eight companies have raised Rs 5,500 crore. The quantum of money raised has dropped this year ahead of national elections in May. The increase in free float because of the rise in minimum public shareholding limit is likely to lead to an increase in India's weightage on global indices, which may increase foreign allocation to India but Nadkarni reckons the IPO market could still be impacted.