The Confederation of Indian Industry (CII) has sought a two-year extension to comply with the new norms of ensuring minimum public shareholding of 25 per cent in listed companies. The Securities and Exchange Board of India (Sebi) had given listed entities time till June 2013.
CII has sought extension of the deadline to June 2015, citing tough market conditions, which have challenged the ability of companies to float new paper in the markets in order to lighten their shareholding.
There are 148 private sector and 14 public sector companies which would need to dilute their equity stakes to comply with the norms. According to the industry body, this would mean compulsory offloading of an aggregate Rs 34,860 crore between June 2012 and June 2013.
The ministry of finance, in June 2010, had notified an amendment to the Securities Contracts Rules, mandating minimum public shareholding norms. Later in the year, Sebi came up with a circular , specifying separate mechanisms designed for increasing the public shareholding for existing companies. “Since December 2010, the market conditions have not been conducive, challenging the ability of companies to comply with minimum public shareholding norms. This had also deterred companies from making fresh issuances, with some getting subscribed to only 23 per cent. The unattractive return on investment in equity is also keeping investors away,” said CII in its statement.
According to the industry body, there is lack of market depth as the average fund raising per year, over the past six years, has been Rs 30,823 crore only. Further, Sebi approvals have been granted for initial public offerings aggregating Rs 11,000 crore and further prospectuses seeking to raise a total of Rs 9,000 crore await the regulator’s approval. Adding the balance disinvestment target set by the government in the current year’s Budget to these figures, the target for the cumulative fund-raising rises to approximately Rs 73,667 crore between June 2012 and June 2013.
“Under the present market conditions, there is a huge risk that such large supply of paper in the market can further depress share prices across the board, hampering the interests of public shareholders. Resultantly, a mandated offloading of shares would result in a sharp decline in share prices, thereby leading to destruction of shareholder value,” said the industry body.
Early this year, Sebi provided alternative methods for companies to increase their public shareholding with the introduction of two routes — Institutional Placement Programme (IPP) and Offer for Sale (OFS) of shares through stock exchanges.
However, only three companies have been able to utilise these options. Experience of the first two transactions shows this process is yet to fully stabilise and the market requires more time to adopt these routes, added CII. “All three of these companies are well researched, which is not the case with most affected companies where introduction of paper in the market, which is many factors higher than their average trading volumes, will lead to a major erosion in existing shareholder value,” said a CII statement.
CII also asked for 25 per cent public holding to also include Depository Receipts and stock options granted to employees. Besides, it suggested removal of the requirement of depositing 100 per cent margin in OFS process. Along with IPP, the industry body asked Qualified Institutional Placement also to be allowed as an alternative route for increasing the public float.
Among its other recommendations, CII also suggested restoring the sale of shares held by promoters through the secondary market, in addition to existing methods, as long as the quantum sold is less than one day’s average trading volume.
