Respect regulations

Govt's U-turn on minimum public float of PSUs is surprising

The benchmark stock market indices hit all-time highs this week and the sustained buoyancy is also encouraging many companies to go public. However, the state of the stock market has had no material impact on the government’s disinvestment programme so far. According to the latest data, the government has only managed to raise Rs 7,648.15 crore so far in the current fiscal year against the full-year target of Rs 1.75 trillion. It is, thus, surprising that the government recently blocked an important option of selling its stake in public sector undertakings (PSUs).

The government has empowered itself through a notification to exempt any public sector listed company from complying with the minimum public shareholding norm. According to the rules of the Securities and Exchange Board of India (Sebi), all listed companies are expected to maintain a public float of 25 per cent. PSUs listed on stock exchanges have been given multiple extensions to comply with the norm — something that has affected liquidity in these counters and has prompted many institutional investors to stay away. If that’s not enough, the government has now changed the rules of the game. This is undesirable and inappropriate at multiple levels. Reducing stake in such firms to comply with the regulation was, in fact, an opportunity for the government to raise resources, which would have helped increase expenditure.
 

It has been reportedly argued that to comply with the regulation, the government would have had to resort to distress selling, which it wanted to avoid. This is a strange logic as the government had enough time to comply with the public float norms. Private sector listed companies were expected to comply with the regulation by June 2013 and the initial deadline for PSUs was August 2014. The latest move makes it clear that the government never intended to comply with the norms. In a number of public sector banks and other firms, the government owns over 90 per cent. In fact, as many as 27 of the 77 PSUs listed on the National Stock Exchange have public shareholding below 25 per cent. The argument that large listed companies should be given more time because a sudden increase in the supply of shares could affect prices may have some merit but the rule must be the same for both the private sector and public sector companies.

Further, the decision to exempt PSUs from the regulation is a U-turn from the stated policy position of the government. Finance Minister Nirmala Sitharaman in her July 2019 Budget speech, for instance, noted that the government would take necessary steps to meet public shareholding norms in all listed PSUs. She further added that Sebi had been asked to consider raising the minimum public shareholding threshold from 25 per cent to 35 per cent. The total disregard of this commitment to raise minimum public shareholding and change the rule mid-way only for PSUs also undermines the position of the securities market regulator and reflect poorly on governance of PSUs, which have historically been non-compliant on various regulations applicable to listed companies. This will further affect PSU valuations and create complications for the overall disinvestment programme of the government.