Election campaigns this year have revived the debate on concentration of wealth in India and how to address it. There has been particular angst about the wealth of Indian billionaires expanding at a scorching pace, while ordinary folk seem to be borrowing to maintain their lifestyles.

While political parties have been debating pie-in-the-sky ideas such as X-raying the wealth of the rich to re-distribute it, more realistic solutions such as inheritance tax, wealth tax and income tax surcharges have been around for some time now. But there’s a limit to deploying them. Wealthy folks have a habit of offshoring their assets or packing off to tax havens, if they think the state is taking too much interest in their assets.

Given the nature of billionaire wealth in India, policymakers can consider another practical and more palatable solution to democratise wealth. They can mandate an increase in the public ownership of listed companies. Current regulations require all listed companies to have a minimum 25 per cent of their outstanding shares held by the public. This is called the MPS (minimum public shareholding) rule. This can be raised to, say, 30 per cent or 35 per cent over the next 3-5 years.

Higher MPS

Skim through the Forbes rich list, and you’ll find that India’s top billionaires are mostly scions of business families with large chunks of promoter equity in listed companies. As Indian stock indices have almost trebled since Covid, the wealth of these billionaires has galloped much faster than that of the average Indian, who invests only 3 per cent of her assets in equities.

Higher public shareholding will not re-distribute this promoter wealth to the poor. But it will certainly help middle-class Indians share in the rising fortunes of India Inc, reducing concentration of wealth with promoters. Promoters will get to cash out of their stakes at market-driven prices.

It is true that it has not been all that easy in the past, to get Indian promoters to cede their ownership stakes in companies. But the stellar run in the markets could smooth the way now. In the past year, Indian promoters have cashed out of ₹1.15-lakh crore worth of stock (a decadal high) by way of offers for sale, private and institutional placements, to take advantage of sky-high valuations. Retail appetite to invest in stocks and equity mutual funds is also at a high because of recent equity returns.

Evolution of MPS

The idea of a regulatory diktat on the minimum public shareholding for Indian listed companies is not a novel one. Prior to 1993, Securities Contract Regulation Rules (SCRR) required all companies seeking to list on the exchanges to offer a minimum 60 per cent of their paid-up capital to the public. Public sector companies were exempted from this rule. The SCRR was amended in September 1993 to reduce the minimum public offer requirement from 60 to 25 per cent. The Securities and Exchange Board of India (SEBI) later baked this into its listing obligation and disclosure regulations, while adding a requirement that companies must have a minimum 25 per cent public shareholding on a continuous basis after listing. Larger companies launching IPOs were allowed to start with a 10 per cent public holding, provided they got to the 25 per cent norm within three years.

Should the regulator look at expanding the MPS threshold to 30 per cent or 35 per cent now, companies must be given a 4-5 year time frame to comply. This will avoid bunching up of offers and also allow promoters to time their stake sales to good valuations. No class of firms, including PSUs, should ideally be let off the hook, as a higher public shareholding offers pay-offs far beyond reining in promoter wealth.

Other pay-offs

Higher free float: In the last five years, the assets of equity mutual funds have nearly trebled from about ₹9-lakh crore to over ₹25-lakh crore, while annual inflows via Systematic Investment Plans have doubled to ₹2-lakh crore. The rising war chests of equity funds however, haven’t been matched by an expanding universe of investible stocks. SEBI data shows the number of listed companies rising marginally from 5,638 to 5,720 in this five-year period. Within this, much of the institutional activity is concentrated in the top 600-700 stocks.

This has led to the problem of too much money chasing too few opportunities. A higher MPS limit can alleviate this problem by opening up more free float in listed companies for retail investors and mutual funds. Higher float can open up headroom for foreign investors to increase their India exposures too, at a time when India weights in global equity benchmarks are on the rise.

A ballpark calculation based on the shareholding patterns of the 2200 actively traded companies shows that their promoters sat on roughly ₹200-lakh crore worth of equity as of May 1 2024. About 620 of these companies featured public holdings of less than 30 per cent. If a 30 per cent public shareholding rule was to be imposed without exempting anyone, this would open up roughly ₹6.4-lakh crore of free float for public shareholders. A 35 per cent public holding would impact 890 companies and free up about ₹11.5-lakh crore of float. This assumes that promoters will cash out of their existing holdings using offers for sale or QIPs. If they were to make fresh issues of shares, the float gain would be higher.

Less manipulation, better governance: Higher public shareholding can also reduce the room for stock price manipulation. Stocks with low free float have been a happy playground for manipulators in this bull market, with operators cornering shares in cahoots with promoters and rigging up prices. Higher public holding will shrink the room for such manipulation. However, this will require SEBI to enforce the minimum public holding rules more seriously, without leeway to promoters to warehouse their shares with friendly local or overseas entities.

Lower promoter stakes will also make it harder for promoters of closely-held companies to push through corporate actions that give short shrift to minority interests, as they will need to work harder to scrounge up majority votes for their resolutions. This can give nascent shareholder activism in India a push.

The announcement of a higher MPS threshold may also have the happy effect of blowing off froth in the Indian markets. The prospect of a large supply of shares hitting the market will likely temper pricey stock valuations, with the stocks that have been artificially propped-up, likely to sink the most.