 "Government, arms need to dilute over Rs 1.26 lakh crore shares in eight months, says SES")
The government and its arms would need to sell shares worth at least Rs 1.26 lakh crore in the listed state-owned entities over the next eight months, if it were to fully comply with the minimum public shareholding norms (MPS) of the Securities and Exchange Board of India (Sebi).
According to analysis by corporate governance advisory firm Stakeholders Empowerment Services (SES), as many as 40 public sector undertakings (PSUs) are not complying with these norms, which cap the promoter holding at 75 per cent.
The MPS rule was enacted with a view that a dispersed shareholding structure was essential for sustenance of a continuous market for listed securities, to provide liquidity for investors and to discover fair prices. While this rule has been in force for private companies, government-owned companies were given a three-year window in August 2014 to comply.
SES suggests the regulator revisit the rule. For, on the one hand, it is not been followed in spirit by the government, the largest promoter. On the other hand, it is not achieving its objective of helping fair price discovery.
“Applying the strict definition of promoter, a total of 23 PSUs and 17 public sector banks (PSBs) are non-compliant as on date. Based on price as on November 2, they would need to divest equity amounting to Rs 1,26,114 crore to become compliant,” SES said.
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There are 57 PSUs/PSBs which are listed (including State Bank of Mysore, held 90 per cent by State Bank of India). The equity in these listed entities is held directly by the government of India or state governments. In many cases, part of the equity capital is held by other listed PSUs.
For analysis, SES has classified listed PSUs into two types. Type-I covers companies where government holds directly more than 75 per cent of the equity and government holding is shown under the promoter’s category. There are 18 listed entities, of which eight are banks, in this category. Based on price as on November 2, these PSUs would need to divest equity amounting to Rs 21,481 crore to comply with the MPS rule.
Type-II PSUs are entities wherein government holding directly is less than 75 per cent. However, together with other PSUs, the holding crosses this threshold, although in these companies, shares held by other PSUs are shown under the public category. A case in point is the recent divestment in NBCC, where a major chunk was bought by Life Insurance Corporation.
By the Sebi definition, LIC is to be included as promoter. Thereby, effectively, divestment has not really achieved compliance. SES argues this sort of divestment does not meet the spirit behind MPS norms. “Unless Sebi relooks at the definition of promoter and classifies LIC, etc (financial institutions) as non-promoter, most of the PSUs will remain technically non-compliant,” it said.
Further, SES is of the view that taking into account historical data, it would be very difficult to achieve the divestment target only by an Offer for Sale (OFS). It is understood that the government is working on a new exchange-traded fund of PSUs. Till now, OFS has been the most popular divestment method. If the government were to follow the OFS route, all these would have to be completed by August 2017. “Whether government will be able to complete dilution within the time frame or not is a big question. The bigger question is what impact OFS dilution will have on the price and extent of discount that will need to be offered,” the report wondered.
An analysis of past OFS data showed that in almost all cases, the price tended to decline prior to and after the OFS announcement. Such a trend indicates the government is not able to get the right value. Market forces determine the prices and any bulk sale impacted price adversely.
SES recommends that a relook at the MPS norm must be undertaken, as the ideas was to provide liquidity and price discovery.
A straitjacket rule of 25 per cent public equity, regardless of total equity and other parameters, does not serve the purpose. The revised MPS norm, it suggests, shall provide differential equity norms according to size of equity.
“For example, how can one even assume that 25 per cent of floating stock of a company with 1,000 crore shares means the same liquidity with 25 per cent of one crore shares. For that matter, present law does not even take into account the number of shareholders. How can the stock have the same liquidity if 100 crore shares are with a million investors or 1,000 investors?” SES asks.
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