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Cap on promoters’ stakes in listed firms

June 03, 2013

MANY listed companies are rushing to meet the capital market regulator’s new rule that promoter holdings should be less than 75 per cent in a listed company.

The Securities and Exchange Board of India (SEBI), the market watchdog, has warned that it would initiate action against companies that violate this norm by June.

About three years ago, the Indian finance ministry amended the Securities Contracts (Regulation) Rules, 1957, making it mandatory for all listed companies to ensure minimum public shareholding (MPS) of at least 25 per cent of shares. Companies that did not fulfill the criteria had to increase MPS by at least five per cent a year to meet the requirement.

Promoters could own up to 75 per cent of the shares of a listed company, but the rest should be held by the public or non-promoter groups. The objective was to step up public holdings in companies and encourage wider participation in the stock markets.

The government, however, realised that many of the public sector companies listed on the stock exchanges had the promoter (the government itself) holding up to 90 per cent of the shares. And it would be politically unwise, it was felt, for the government to dilute its stake to 75 per cent in all public sector firms.

SEBI then amended the rules, allowing state-owned listed firms to opt for a lower, 10 per cent public holding limit. The market regulator also extended the deadline for public sector companies to meet the new norms to August 2013, while private sector firms had to comply with the rules by June 2013.

While there were more than 200 listed companies that would have to fall in line with the new norms, strangely most of them did not bother to take any action over the past three years. Many of the promoters felt the time was not ripe to dilute their stake, citing the sluggish market conditions. They were expecting better premiums while off-loading their holdings to the public.

Worried that most of the companies would fail to meet the deadline, SEBI relaxed the rules further last year, allowing many options for promoters to dilute their holdings. They could sell their shares through the offer-for-sale (OFS) route on the stock exchange, or the institutional placement programme (IPP).

This would ensure they would not have to go through the complex process of coming out with an Initial Public Offering (IPO) or a Follow-on Public Offering (FPO), which is a long-drawn and often expensive exercise.

SEBI also allowed companies to issue free bonus shares or right shares to non-promoters, thus reducing their stake to 70 per cent or below.

Of course, in the process the market regulator had watered down the original objective of the scheme, which was to allow more individuals (the retail public) to have shares in listed companies. The OFS and private placement to institutions would ensure that institutional shareholding would remain high in a listed company.

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BY last August, less than 10 companies had diluted their promoter’s stake and another 200 odd listed companies had to do so by this June. It is only over the past few weeks that companies have started falling in line, reducing their promoters holding.

“Companies were given three years to comply with these norms and this timeframe should have been sufficient for anyone willing to meet the guidelines,” says U K Sinha, chairman, SEBI. “If we find that a company has decided consciously not to follow the guidelines, I would assume that they are doing it willingly and therefore they are willing to face the consequences.”

While not specifying what action the regulator would take against such companies, Sinha notes that minority shareholders and the public would not suffer because of the reluctance of the promoters to dilute their holdings. The regulator might end up slapping fines on companies that do not adhere to the new rules by the end of next month.

By last week, there were at least a hundred listed companies that had not complied with the new norms. And over the next few days, the promoters of these firms will have to sell shares worth Rs200 billion to meet the rules.

Bank of America – Merrill Lynch estimates that stocks worth about $1.8 billion would be sold in a last-minute attempt by private sector companies to meet the SEBI deadline. An additional $2.5 billion would be raised by the government as a promoter by August to dilute its holdings in listed companies to 90 per cent. There are a dozen state-owned listed companies where the government has more than 90 per cent holdings.

Kotak Institutional Equities estimates sale of $1.9 billion worth of shares by 75 private sector promoters. So far, promoters have raised about $9 billion through 44 OFSs and eight IPPs.

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The amendment to the Securities Contracts Rules, raising the MSP, affected not just Indian public and private sector firms, but even multinationals. And there has been resistance from both domestic and foreign promoter groups.

Gillette India, which is majority owned by Procter & Gamble, has been battling SEBI’s moves for several months now. It decided to re-classify some of its promoters as non-promoters, but the regulator has not accepted the move. Promoter shareholding in Gillette India was 88.76 per cent.

Last week, AstraZeneca Pharmaceuticals AB Sweden offloaded 3.7 million shares through the OFS route to meet the new norms. Thomas Cook India diluted the promoters’ shareholding (of 87.1 per cent) by opting for the IPP route.

Some foreign companies threatened to de-list from Indian stock exchanges rather than dilute their promoter’s holdings to below 75 per cent.

This resulted in a rush for the scrips of such companies as speculators were hopeful of getting a premium from the promoters when they opted for delisting. However, with the regulator not budging, and insisting on the dilution of promoter’s holding, most international companies have decided to fall in line instead of delisting.

The government is also choosing the easy way out to bring down its shareholding in public sector companies to below 90 per cent. With the investing public showing a lukewarm response to new issues, Life Insurance Corporation of India, the state-owned insurance giant, has been quietly mopping up shares of listed public sector firms that opted for the OFS route from the stock markets. In effect, this means the government’s stake remains above 90 per cent, defeating the very purpose of the move to enhance public shareholding in companies.The last-minute rush to catch up with the deadline has resulted in many of the promoters being forced to offer their shares at a discount to the market price to attract buyers in the OFS window. On Wednesday, for instance, half a dozen companies were forced to offload shares worth nearly a billion rupees at a discount.

Many companies were fixing floor prices that were at a discount ranging from five per cent (Jet Airways) to as high as 32 per cent in the case of Novartis.

Indian IT major Wipro – in which promoter Azim Premji has a dominant share – took a novel step to dilute the promoters’ holding.

It got SEBI’s approval for a move to transfer shares in excess of 75 per cent to an ‘irrevocable independent trust,’ which would only be involved in philanthropy.