Indian Law mandating 25 Percent Minimum Public holding in Listed companies Positive for investors but Negative for Stock Prices

India passed guidelines on the implementation of a new law that mandates that all publicly listed companies will have to raise the stake of public shareholding in companies to a minimum of 25%. This proposal has been on the anvil since last year when India’s Finance Minister had proposed this rule to increase transparency and liquidity in publicly traded securities This law should be a positive for investors as it would allow them to buy shares in closely held companies like Wipro, DLF etc at lower prices.Currently a lot of these stocks trade at higher prices based on liquidity premium and are susceptible to market manipulation due to their low float.The infamous case of Akruti City Short Squeeze shows the market distortion caused by low public shareholding.This also might lead to short term pressure on the Indian markets as additional issuance of paper would probably lead to lower prices .The Key Features and Consequences of this Law are

1. Companies with less than 25% shareholding in the hands of investors other than promoters and their associates will have to raise the public shareholding by a minimum of 5% each year.This rule also applies to companies which have filed their prospectus with the Indian regulator
2. If the Initial Public Offer is greater than ~$900 million then the company is allowed to start with a 10% public shareholding subject to  5% raise each year.The companies can dilute stakes either through sale of promoter stake or through issue of fresh equity
3. This implies that around $13 Billion will have to be issued this year with around 2/3rd of the proceeds to be raised by state owned public companies .A total of ~$50 Billion Dollars will have to be raised in the next 3-5 years to comply with this rule.
4. Crisil has estimated around 180 companies will have to divest stakes to follow the new SEBI rule .Major private companies (that are part of Indian main index the Nifty) will be affected by this rule are Wipro , Reliance Power, DLF and Tata Communications.Major state owned companies NMDC, NTPC, SAIL, NALCO, Neyveli Lignite, OIL.Note the government is already in the process of divesting stakes in PSUs like SAIL, Coal India, Power Grid, Engineers India Limited, MMTC and Hindustan Copper

Summary

This new rule is a progressive step by India’s authorities which will lead to increased transparency and scrutiny of India’s publicly listed companies.Most of the Developed Markets around the world have a stipulation for minimum public float , with the world’s largest companies having a significant public float percentage.Even in India, Companies with a large public shareholding are in general perceived to have stronger corporate governance and have enjoyed better performance .

India May See $53 Billion Share Sales on Public Holding Rule – Bloomberg

Oil & Natural Gas Corp. and Reliance Power Ltd. are among a sixth of the top 3,000 listed Indian companies that may need to sell $53 billion of shares after a new government rule raised the minimum public holding.Companies must increase shares held by the public to a minimum 25 percent by selling at least 5 percent annually, according to an e-mailed statement from the government’s Press Information Bureau yesterday.The rule may prompt equity sales of about 2.5 trillion rupees among companies including state-owned ONGC, India’s biggest energy explorer, and Reliance Power, owned by billionaire Anil Ambani, according to data compiled by Bloomberg. The step will also boost government efforts to reduce stakes in its companies and cut the budget deficit.