Will dilution of promoter stake to 65% be good for the market? 4 experts weigh in
The new proposal, if implemented in a calibrated manner, is good news for investors and lenders.
Yes: C.J. George Managing Director, Geojit Financial Services
Policymakers should provide an ecosystem of low impact cost for public investors and thus attract more investments. Given this basic rule, the Budget proposal for increasing the minimum level of public shareholding is a welcome step.
Investors and lenders look at the liquidity of a stock while calculating risks. Big investors normally avoid illiquid counters as the impact cost is high. A large number of FPIs shy away from most stocks because the counter doesn’t offer liquidity. This leads to crowding for a few large-caps, even if public float in them is dismally low.
The new proposal, if implemented in a calibrated manner, is good news for investors and lenders. More international investors will start looking at the Indian stock market if the impact costs come down, enabling them to enter and exit smoothly. The promoters can decide whether they want public listing or not. For listing and trading, the impact cost for public investors should be low. This will enhance the relative position of the Indian market among global portfolio investors as well as Indian investors. Thus the proposal has twin gains. It will make markets globally attractive and give more room to retail investors.
Sebi should take slow and steady steps in this direction as we cannot afford to spook the market in one go. The right step will be to start with all IPOs immediately. The promoters and investors of listed companies may be unhappy. But in the larger and longer-term interest of the nation and the market, Sebi should take strong steps to reach 35% public float, starting with the lowest public float companies and by stipulating year-wise thresholds to reach the targeted level. A five-year window with a calibrated plan will be ideal.
Yes: Jinesh Shah Partner, KPMG India
India has traditionally been a promoterdriven market with promoters not keen to relinquish control of the business. Free float of Indian corporations is among the lowest compared to developed markets.
The proposal to increase public shareholding from 25% to 35% in listed companies is laudable and a welcome move. It will improve the market depth, increase the free float and will also prevent concentration of shares. It will also reduce vulnerability of stocks to market manipulation.
The move will enhance India’s weight in global indexes, which will help in attracting additional foreign capital in India. It will also be a boon for public shareholders as there would be more participation of financial and institutional investors in the decision-making process, leading to enhanced transparency. Divestment of shares by promoters will also lead to substantial increase in the government’s tax kitty, which could be employed for various development and infrastructure projects.
The tightening of corporate governance measures is the need of the hour especially in light of the recent crisis in the credit markets and to give impetus to India’s vision of being a $5 trillion economy in the next five years. Higher public participation improves price discovery of stocks in the market and also strengthens the essentials of corporate governance. This will also boost brand value and the business image of Indian corporations around the globe.
In the last few years, there has been a surge in retail investors moving from traditional investment products to investment in mutual funds and direct equity. The additional 10% float will help such investors and funds to tap the market and participate in buying strong stocks.
No: Amar Ambani President & Research Head, YES Securities
Forcing promoters to offload stakes might be unwarranted. When the market is grappling with a liquidity crunch, a squeeze in secondary market liquidity, that this move would trigger, is undesirable.
A category-wise look would throw more light on its likely impact. In large-caps like TCS, the promoters hold close to the maximum stake band and are sitting on a cash pile. Given their free cash flow, these large-cap promoters don’t need capital or debt; neither for themselves, nor their businesses. It would make better sense to allow capital flows to businesses that need growth capital. In recent years, many new and innovative entities have enriched the market—rating agencies, insurance companies, depositories, exchanges and ecommerce companies, among others. These are players who ensure a healthy capital raise across sectors and deserve more growth capital. Even the economic survey has stressed on the need for investments into these bets.
Most mid-cap and small-cap investors are under-researched who don’t have the wherewithal to stay well informed. This implies that more promoter skin in the game helps the common investor’s cause. In the MNC space, promotors prefer to hold close to 75% stake, but given their excellent value props, authentic business models and scrupulous governance, small investor money is protected. A forced offload may prove counter-productive.
There isn’t a strong case, therefore, for changing the current 75-25 shareholding stipulation to 65-35. Even if the regulator ensures a staggered implementation of the offload, the impact would still be huge, causing a year-on-year strain on the secondary market flows.
No: Shardul Shroff Executive Chairman, Shardul Amarchand Mangaldas & Co
In the maiden Budget speech, Finance Minister Nirmala Sitharaman voiced her intention to ask Sebi to enhance minimum public shareholding (MPS) to 35%. Her multiple messages—equity support to stressed banks; setting an enhanced disinvestment target of Rs 1,05,000 crore; better public ownership of PSUs, bringing greater commercial and market orientation of listed PSUs by meeting public shareholding norms and enhancement of public shareholding to 35% for all listed and to be listed companies are conflicting.
The change in policy of retaining 51% government stake to retaining 51% stake inclusive of the stake of government controlled institutions also impacts liquidity of the Navratna PSUs and their valuation. This is a recipe for chaos and will bring in its wake deleterious effects on the secondary and primary markets. Listed PSUs have a deadline of 3 August 2020 to comply with MPS. The government holds in excess of 75% stake in 16 PSU banks. The market will face a serious liquidity crisis when the market complies with MPS by selling shares to the public.
The proposed change is a weapon of mass destruction, as it impacts 1,174 listed companies and the quantum of sale that needs to be carried out is a humungous Rs 3,87,000 crore. Money availability will be tight and funds for investment will dry up. Fund raising for startups and ventures, especially those in the social field at the proposed social stock exchanges, will be affected, as the main markets will tank. Market stability will be impacted and the indices will be disturbed. Non-compliance of MPS carries the threat of freezing of such noncompliant shares and loss of directorships in all other companies besides fines.