- Background: In view of the Government’s goal to achieve a US$ 5 trillion economy, the Finance Minister proposed a number of reforms to invigorate the Indian economy as part of the Union Budget 2019-2020 including a request to SEBI to consider increasing the minimum public share-holding (“MPS”) thresholds for listed entities from 25% to 35%.
As expected, this announcement has led to a lot of speculation in the market as to the manner in which this change will be introduced and the timelines within which the companies will be required to achieve this. SEBI is examining the proposal and is likely to issue a discussion paper which will be followed by detailed regulations for this transition. News reports suggest that SEBI is in favour of deferring this until more research and impact analysis can be done. - Rationale: At the time of increasing the MPS threshold from 10% to 25%, the Department of Economic Affairs (“DEA”) had issued a discussion paper explaining that a larger public float reduces the scope for price manipulation, leads to better price discovery and is an effective tool for redistribution of wealth in India. We expect a similar rationale to be provided for the further increase to 35%. Globally, there is no precedent for a 35% minimum public float. It typically ranges from 15%-25% in most countries.
- Regulatory regime: The requirement for every listed company to continuously maintain 25% public shareholding is set out under the Securities Contracts (Regulation) Rules, 1957 (“SCRR”) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”). Accordingly, both these legislations need to be amended to increase the MPS requirement to 35%.
- Implementation steps and timelines: SEBI ought to give sufficient time to promoters to meet the MPS requirements. When the MPS threshold was increased to 25%, the process took many years with the DEA issuing a discussion paper in 2008 and the SCRR and listing agreement actually being amended in 2010. Listed entities (other than PSUs) were given a period of 3 years to comply with the revised norms.
- Divestment options: We expect all currently available offloading options to continue but SEBI is likely to suggest some new mechanisms as well. SEBI may also implement a series of staggered increases in the forthcoming years in order to enable companies to reach the 35% MPS level.
- Negative impact: The 2008 DEA discussion paper had cautioned that a very high public float could discourage closely held well-run profit making companies from going public or even promote delisting. Press articles already indicate that several listed MNC’s will be considering delisting if the proposed MPS norms are brought into effect.
- Way forward: Given previous interaction between the Government and regulatory agencies, it seems likely that if the Government is serious about this change, the same will be implemented, with the real debate being limited to the method and timeline for implementing the change. The substantial pushback anticipated may ensure more creative methods of increasing the MPS, or a significant period for implementing the change.
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