How easily the best-laid plans of Indian regulators go awry. A good case study on this is the minimum public shareholding rule, the 2010 brainchild of the Finance Ministry, the deadline for which is coming up in just a few weeks.
Notified in June 2010, this new rule made it mandatory for all listed companies to ensure that at least 25 per cent of their shares were held by the public. This norm was based on sound logic. Forcing India Inc’s promoters to loosen their pincer-grip over listed companies, it was felt, would strengthen the capital markets through greater retail participation, more democratic decision-making and higher floating stock and liquidity. But three years on, with the deadline looming, we seem no closer to achieving these lofty objectives than we were when the rule was first announced.
Dash to the finish
For one, in the typically Indian way, many of the 210 companies that had to comply with these norms have left it to the last minute. This is despite the ample transition time of three years that they were given to fall in line with these norms.
When the norms were announced in 2010, private sector companies were given three years until June 2013 to reduce their promoter holdings. State-owned companies (for some inexplicable reason) got an extended deadline of August 2013, with a lower 10 per cent public holding limit. Yet several of these companies have spent the last two years either complaining about market conditions, or desultorily seeking clarifications from the Securities and Exchange Board of India (SEBI).
Anxious about the slow progress, SEBI, in early 2012, even opened up four new routes for companies to increase their public holding. Promoters were allowed to sell stakes through offer-for-sale (OFS) on the stock exchange or via private placement to institutions, without the elaborate rigmarole of a public issue. Unbending further, SEBI also allowed companies to issue rights or bonus shares only to non-promoters.
These relaxations, to some extent, watered down the original intention of the rule. By placing shares with as few as 5-10 institutions in a non-transparent manner, companies could now achieve higher free float without really adding retail investors or broad-basing their shareholding.
India Inc’s promoters, however, continued to drag their feet. Taking stock of the situation in August 2012, SEBI noted that only 9 companies had used the above routes to expand their free float, raising Rs 3,100 crore. Over 200 companies remained non-compliant and had to raise Rs 32,000 crore over the next nine months.
By then however, promoters who hadn’t diluted their stakes had a good excuse for their inertia — a moribund market. How could they sell their shares at such rock-bottom prices?
Jugaad solutions
A few astute ones had some Jugaad solutions to this problem.
In mid-2010, Reliance Power effected a merger of group firm Reliance Natural Resources with itself. The merger attracted a lot of flak because of a swap ratio that was way out of sync with market prices. But it did serve one purpose. It lowered the promoter stake in Reliance Power from 84.78 per cent to 80 per cent, without the former having to sell any shares to the public.
Mergers can be complicated. So Gokaldas Exports and Gillette India had a much simpler idea — re-define who their promoters are. In a bid to reduce its promoter holdings of 88.3 per cent, Gokaldas ‘reclassified’ its Indian promoters — the Hindujas — as ‘minority’ shareholders, claiming that it was private equity firm Blackstone which was now calling the shots on the company’s operations. Gillette India, majority owned by P&G, too has been fighting a pitched battle with SEBI for much of the past year, on a move to redefine its own promoter group. Moves such as this may very well help companies meet the public shareholding norms on paper. But with no change in the actual ownership of shares, it is difficult to see how they will enhance retail participation or even liquidity, as the norms originally intended.
But when it comes to complying with the law not just in letter, but in spirit, public sector firms haven’t been pure as driven snow, either. For, with the government’s stake sales meeting with tepid investor response, it is LIC which has obligingly picked up a chunk of shares in the OFS from companies such as Hindustan Copper, Rashtriya Chemicals and many others. Does the transfer of holdings from one arm of the government to another really amount to ‘broad-basing’ the public shareholding? And given LIC’s record of rarely transacting on its equity holdings, will this move materially improve liquidity?
MNC drama
Then there is the sideshow to this entire drama in the form of the speculative action it has generated in multinational company (MNC) stocks.
When the minimum public holding rule was first announced, a section of MNCs issued an ultimatum to the policymakers that they would choose to de-list from the Indian bourses rather than dilute their parents’ holdings.
Speculators then had a field day, with MNC stocks ranging from the little-known Linde India and Styrolution ABS to the AstraZeneca Pharma and Oracle Financial going through wild gyrations on ‘delisting hopes.’
But after taking their own sweet time in making up their mind, many MNCs have since clarified that they would not de-list after all and would be selling down the parent’s stake instead. This has sent their stock prices crashing down.
Pharma MNC Fresenius Kabi, in fact, has done both. It first placed shares with institutions through an OFS and then announced, barely six months later, that it planned to de-list. Proxy advisory firms have alleged that the OFS was simply an expedient move to raise institutional holdings in the stock, rendering it easier to de-list.
After all this action, we may well be headed for a photo finish on the minimum public shareholding issue. At last count, based on their end-December 2012 shareholding, 100 companies fell short of the public shareholding norms and were required to raise over Rs 20,000 crore in fresh capital.
Over the next few weeks, some of these companies may well scramble to sell their shares at a discount. SEBI, which has been making threatening noises, may crack the whip on companies that fail to make it past the finishing line in time.
And policymakers may pat themselves on the back on establishing the rule of law.
But amid all this action, we may forget to check if the minimum public shareholding rule, for all the trouble it caused, did achieve its bigger purpose — of expanding retail participation, ensuring better distribution of voting rights and boosting market liquidity. Chances are that it didn’t.