Neyveli share-sale plan defies public holding intent: Analysts

No level playing field for PSUs and private cos, they add

The Securities and Exchange Board of India (Sebi)’s decision to allow the Tamil Nadu government to buy the Centre’s stake in Neyveli Lignite Corporation (NLC) to meet minimum public shareholding norms has faced criticism from advocates of sound corporate governance practices. Though the move would help cut the Centre’s stake in NLC below 90 per cent in letter, the sale of shares from the Centre to a state defeated the objective of diverse ownership and better free-float, said a former Sebi official, as well as officials at corporate governance advisory firms.

Currently, government holding in NLC stands at 93.56 per cent. To meet Sebi’s minimum public shareholding norms, it has to be cut to less than 90 per cent before August 9.

The government’s decision to divest shares in NLC had met stiff opposition from Tamil Nadu-based political parties; about 30,000 workers of the company had gone on strike.

After discussions, Sebi allowed four Tamil Nadu-owned entities that would qualify as qualified institutional bidders to acquire stake from the government.

“The spirit (of minimum public shareholding, or MPS) is to ensure wider holdings and increase the depth of trading of securities. By allowing state PSUs (public sector undertakings), whose business isn’t securities trading, Sebi hasn’t applied this first principle and the logic of MPS gets flawed,” said Shriram Subramanian, founder and managing director, InGovern Research Services.

In 2010, the government had amended the Securities Contract (Regulation) Rules, making it mandatory for private companies to have at least 25 per cent public holding (10 per cent for PSUs). The objective behind the move was to ensure disperse ownership to curb manipulation by having more liquidity.

Amit Tandon, managing director, IIAS, believes the manner in which a company complies with the norms is critical. “If it is achieved through a process that gives any investor a chance to participate at a market clearing price, the minimum public shareholding criterion should be considered being fulfilled,” he said.     Turn to TSI, Page 15 >

Experts said there were gaps in the system, in terms of applying minimum public shareholding norms to state-owned companies. Most divestments of stake in PSUs have been bailed out by Life Insurance Corporation (LIC), another state-owned entity. “The government’s stake in Neyveli would probably have been sold to LIC if the company had to come out with a share-sale. Neyveli Lignite’s proposal being accepted by Sebi seems just an extension of this example,” said Tandon.

M S Sahoo, secretary of Institute of Company Secretaries of India and former whole-time Sebi member, believes the government selling its stake to ‘non-promoters’ would mean the norms would be met merely in letter.

While allowing different routes for compliance in the case of private companies, Sebi has been strict. It hasn’t allowed preferential allotment of shares or re-classification of promoters as routes to meet the MPS requirement. “This is not the first time Sebi has differentiated PSUs from private companies. In the past, the need for the number of independent directors on the board was relaxed for PSUs. It needs to be seen whether other PSUs that have to meet MPS norms by August are allowed to be lax,” Subramanian said.

“The rules are, of course, different for private sector companies and PSUs. While the former is required to have 25 pr cent MPS, the latter needs to have 10 per cent,” said Sahoo.

Tandon said there had been several instances, including the case of IFCI, of government-owned companies being exempted from an open offer and the appointment of shareholder directors in state-owned banks. This, he added, highlighted the fact that there was no level playing field.