The Securities Contracts (Regulation) (Amendment) Rules, 2010, notified on June 4, 2010, has implemented the Government decision to increase the public float in listed companies to atleast 25 per cent (Amendment).
Prior to notification of the Amendment, companies fulfilling certain conditions specified in Rule 19(2)(b) of the Securities Contract Regulation Rules, 1957 (SCRA Rules), were allowed to list their securities with a public float of even 10 per cent, and companies not fulfilling such conditions were required to have a public float of atleast 25 per cent.
The stock exchanges were further empowered to relax the said condition(s) for any company going public, with prior approval of the Securities Exchange Board of India (Sebi).
It is believed that these rules were framed by the Government almost a decade ago with a view to enable companies in sectors such as information technology and telecom, to list with a smaller public float of 10 per cent. Thus, historically, the public float in listed companies has not been uniform.
Although, the Amendment will result in companies having a wider spread of public shareholding, it does not entirely do away with a dual threshold for listing.
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A company, whose draft offer document is pending with Sebi on or before the date of commencement of this Amendment, may still list having a public shareholding of 10 per cent, if the post issue capital of such company calculated at offer price is more than Rs 4,000 crore.
However, such company is required to achieve the 25 per cent public shareholding level, by increasing its public shareholding by atleast 5 per cent on an annual basis, beginning from the date of listing of its securities, in such manner as may be specified by Sebi.
The Amendment, further, allows such company to increase its public shareholding by less than 5 per cent in a year, where such increase brings its public shareholding to 25 per cent level in that year.
Before the Amendment was published in the gazette, concerns were raised and there was much debate as to the manner of calculating the minimum public float of 25 per cent and whether the entire pre-IPO investments (made by private equity players and institutional investors) and employee holdings would be treated as non-public holdings for calculating the minimum public float of 25 per cent.
In this regard it is heartening to note that the Amendment has defined the word “public” to mean persons other than (i) the promoter and promoter group; and (ii) subsidiaries and associates of the company; and the expression “public shareholding” to mean equity shares of the company held by public and shall exclude shares which are hold by custodian against depository receipts issued overseas.
Although, the meaning of “associates” in the definition of “public” is not clear, but for the present, it appears that the pre-IPO investments (made by private equity players and institutional investors) and employee holdings will continue to be treated as public holdings for calculating the public shareholding, post listing.
However, in terms of the Amendment, companies, going in for IPOs and having the post issue capital of less than Rs 4,000 crore (calculated at offer price), will have to offer and allot equity shares in terms of an offer document.
Further, the Amendment requires listed companies with public shareholding below 25 per cent, to bring its public shareholding to the 25 per cent level by increasing its public shareholding by atleast 5 per cent on an annual basis, beginning from the date of commencement of this Amendment.
With over 200 listed companies having a public float of less than 25 per cent, the market will, on existing valuation, require a significant amount of money to enable such companies to comply with the Amendment.
The uncertainty about the appetite that current markets may have for such follow-on offerings, therefore, raises concern as to what will happen if there are no takers of stock of a listed company, which is trying to achieve minimum public float of 25 per cent? Who will be responsible for such non-compliance and what will be the consequences of such non-compliance?
At present, the law provides for either suspension or withdrawal of admission to dealings in the securities of the company as a consequence for non-compliance of the SCRA Rules. Is compulsory delisting an answer?
However, given that the intent behind the Amendment is to ensure greater liquidity and public access to such stock, applying such penal measures may well result in throwing the baby out with the bathwater! Since, these issues are not specifically addressed by the Amendment, the Government may soon have to go back to the drawing board to provide some solutions.
The author is Principal Associate at Amarchand & Mangaldas & Suresh A. Shroff & Co. Views are personal