Minimum public shareholding to be 25%

The changes to the Securities Contracts Regulations Rules will have far reaching implications to the markets in the medium and long term. The 25% minimum public shareholding has been under debate and discussion for quite some time, but it was at best an item on the discussion board. With this amendment it has opened a flurry of activity and the current hot temperatures are likely to make many corporate and investment bankers worried about the implication of such changes.
Let me make an attempt to look at it from an investor’s perspective.

Firstly the government will now have a spate of follow on offers and there are enough offerings for them to offer going forward at a minimum of one issue every month if not more for the remaining 4 years of the term of the present government. With such a steady flow of paper, private companies will have to compete with the government on the one hand, and the market conditions on the other and therefore pricing will become a key to the success of the IPO. Retail investors will have a great choice and every issue coming will have to offer value or leave money on the table if it wants to do well.

Some of the government companies have holdings in excess of 90% and are traded on the exchanges would have a tough time finalising their issue prices. We are all aware of what happened in NMDC FPO where the FPO floor price of Rs 300 also gave way and the share price is now quoting at Rs 274.30. There are companies like MMTC where the government stake is 99.33% and the share price of Rs 29,618 is trading at a PE multiple of 681.75. Some other companies where the holding is almost total include Hindustan Copper 99.59%, HMT 98.88% and FACT 98.96%. 

Coming to the issues which are in the pipeline the 4000 cr post issue market cap gives the issuer company leeway in the year of issue but post issue future dilution becomes a Damocles sword hanging on investors. Many of the real estate players and power issues could be affected as a result of these changes.
The secondary markets will also see changes and the take over and delisting or reverse book building would become interesting. It is a current practice that companies which are holding in excess of 74% and closer to the 80-85% range offer to delist by the reverse book building method and accept the price discovered in the reverse book building process and then post delisting acquire the minority shareholders shares by resorting to section 100 of the companies law and cancelling the shares of minority investors.

It would be fair to assume that there will be hectic activity in the primary market and pricing which has always been a key issue will now become extremely important. Irrespective of how the issue has fared in the first round subscription, its market performance post listing would now become more important. The company has to come back to the markets in the next year to again raise capital. If investors have not benefited after the IPO, there is no way they would be able to make a successful issue in the subsequent year. I believe till now it was only people from the investor community who were critical about issue pricing, but now it would effectively become a statutory warning that all companies going public would be told to look at future earnings and back calculate prices to what is a fair price.
This really augurs well for our markets. The present finance minister should be complemented for amending the regulations and taking the first step to bringing wider shareholding or dispersed shareholding. This incidentally was part of the budget speech of the finance minister this year.    

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