The level of public shareholding that Indian listed companies are required to have has come to the fore yet again. The Union Finance Minister made a mention in his Budget speech that the government would increase the public float available in the stock market and bring about uniform requirements in this area.
In February 2008, the Union government published a discussion paper on the subject and had invited comments. Although the discussion paper at that stage surprised the market because the Securities and Exchange Board of India (SEBI) had after significant efforts streamlined the listing agreement between stock exchanges and listed companies.
Under the listing agreement, every company is required to maintain a minimum public shareholding (defined as non-promoter holding) of 25 per cent. Companies having an average daily market capitalisation in the previous financial year of Rs 1,000 crore and at least 20 million shares were required to meet a minimum public shareholding of only 10 per cent. There was also a carve-out for companies that had been given a relaxation at the time of their listing by the Union government under the Securities Contracts (Regulation) Rules (SCRR) to meet only a 10 per cent public shareholding requirement.
The discussion paper of the Union government wanted a debate on the standards for initial listing and continued listing in the SCRR, and the need for uniformity in these two objectives, a clear conceptualisation of the term “public” in connection with understanding “public shareholding” or “public float”, and removal of any special dispensation for state-owned companies to end discrimination against the private sector. Specifically, the government wanted SEBI not to have any powers to relax these norms for any person. The discussion paper proposed that a uniform public shareholding level of 25 per cent ought to be prescribed across the board.
The Finance Minister’s speech has raked up the debate on the level of public shareholding again, thanks to its seeming proficiency in ‘stealth reform’. The apparent attempt was to create a law that mandates divestment of holding by substantial shareholders in companies that are in breach of meeting minimum public holding requirements. Thereby, it is felt that government would be forced to divest its holding in listed public sector companies and therefore explain to opponents of the disinvestment programme that the government is merely complying with the rules by selling stock in state-owned companies.
To achieve this objective, all the government needs to do say that the existing law will be applied in a uniform manner across all companies – state-owned and private sector companies. Also, the government would do well to synchronise the listing agreement and the SCRR, or better still, scrap one of the two and maintain one single body of law. The listing agreement – a bilateral contract – is in a form prescribed by SEBI. SEBI directs amendments to the listing agreement on an ongoing basis. The contract does not actually get
executed to effect the amendment but the system starts following the amendment. While this is not legally correct and will not be efficient in an enforcement situation, the system has come to accept the norms more like “rules” rather than as “agreements”.
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There are other areas of reform that the government would do well to address. Whenever the listing agreement gets amended, the SCRR does not necessarily follow suit. Both bodies of law regulate and govern the same subject viz. the level of public shareholding that ought to be maintained by a listed company on a continuous basis. While the SCRR governs the level of public offer that ought to be made at the time of the first listing, the SEBI (Disclosure and Investor Protection) Guidelines (DIP Guidelines) regulates the subject too. There is a dichotomy in the two thresholds – the DIP Guidelines focus on minimum “promoter contribution” rather than on minimum public shareholding. There is also the eternal debate on whether non-promoter holding necessarily constitutes “public float” and whether shares whose trading is constrained by shareholder agreements ought to be disregarded as public holding.
The system of enabling a lower public shareholding requirement for companies with a large market capitalisation and large number of outstanding shares put in place by SEBI in the listing agreement, was presumably based on good empirical research and foundation. Even if the government does not manage to steal in substantial reform like merging the SCRR and the listing agreement, and enabling SEBI, the expert market regulator to manage the single comprehensive body of law, the government would do well to replicate the carve-outs established by SEBI in the listing agreement in the SCRR so that the SCRR speaks the same language as the listing agreement.
Right after the Finance Minister’s speech a number of investors who had plans to scale up ownership in Indian listed companies have started reconsidering their plans. Naturally, one would not want to make a large plan to scale up shareholding in India, only to be told a short while later that one would have to scale back. Moreover, the absence of predictability poses for investors in India a constant feeling of playing a game of chess. The extent of strategising that one has to do while considering investing in India, solely on the interpretation of the legal system, is not a good sign.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
somasekhar@jsalaw.com