Sebi chief Ajay Tyagi slams India Inc over poor disclosure standards

Tyagi says the market regulator is examining free float in listed companies

The Securities and Exchange Board of India (Sebi) along with stock exchanges have embarked upon an exercise to determine the actual free float in listed companies. Free or public float is a term used to refer to the shares of a company held by the public at large and which are free from any encumbrance or lock in.

“We are examining what is the minimum public shareholding and is the actual float…Whether 25 per cent minimum public shareholding does actually mean 25 per cent free float,” said Ajay Tyagi, chairman, Sebi. He was speaking at a capital market conference organized by industry body FICCI.

The move comes amid concerns that certain foreign funds have cornered the bulk of the free float in several listed stocks, leading to stock price manipulation. Tyagi, however, said the exercise isn’t against any particular script.

“This is not specific to any company nor do we have any intention of increasing the free float,” he added.

All listed companies are required to maintain at least 25 public shareholding. In Indian context, non-promoter shareholding is typically classified as public float. Higher the free float, the better it is considered to be price discovery and transparency.

“Public shareholding adds to liquidity in the market. That leads to better price discovery and efficiency. Some of the free float is held by institutional shareholders, who hold it till maturity. We in consultation with exchanges are looking at what is the free float,” he said.

Experts said the study could have wide implications for the market.

“There will be several companies where on paper the public float is 25 per cent but the genuine float may not even be 10 per cent. It remains to be seen what Sebi does in such cases,” said an analyst asking not to be named.

While Sebi currently looks at promoter and non-promoter holding for arriving at free float, index providers such as MSCI, the arms of BSE and NSE have a different approach. For instance, they don’t consider shares under lock-in or any kind of encumbrance as free float even if they are held by the public. This is to ensure that the funds tracking their indices have enough legroom to invest.

Last month, MSCI had warned India and four other emerging markets (EMs) over restrictive policies and said any move that impedes overseas investment could lead to a downgrade. The global index provider had highlighted low available legroom for foreign portfolio investors (FPIs) in several Indian stocks as one of the concern areas.

Poor disclosure standards

Meanwhile, the Sebi chief slammed India Inc over poor standards of disclosures. “Disclosures by many companies are lacking. On periodic disclosures such as annual reports, while all the fields are being filled in, in many cases, they appear more like a check-box exercise. This is not acceptable. Documents as important as the financial results, annual reports corporate governance reports and others need the level of quality the investors deserve,” he said.

Tyagi said companies are not forthcoming in making disclosures around material events. They only reply to stock exchange queries which are based on media reports. “This is surely not the right way to go,” he said.

On the market rally

Tyagi said the stock market gains are driven by easy global liquidity and low interest rate regime. He said the markets will be impacted once the interest rates are raised or liquidity is withdrawn.

“But it is not totally irrational exuberance as markets are forward looking. As compared to other emerging economies, India is doing much better. For the time being it is going to sustain. For IPOs this is an opportunity to raise capital,” he said.

On Spacs

Tyagi said Sebi’s primary market advisory committee is preparing a report on introducing the concept of special-purpose acquisition company (Spacs) in India. He said the regulatory body will act quickly once the report is submitted.

“As per as India is concerned if such reverse mergers were to happen. That will have to go through NCLT under the Companies Act. If we are going to have a framework, we would rather have one which is under Sebi’s domain. But some of the concerns that have come up need to be deliberated to protect minority shareholders' interest,” he said.

Spacs have become a popular instrument in the US. It involves a listed shell company buying a well-run private company, thereby making it a publicly-listed entity without taking the IPO route.