The catalyst

Free float rider will improve liquidity and curb price manipulation

The Securities and Exchange Board of India's latest plan is to make listed companies have a minimum free float of 25 per cent. According to Business Standard Research Bureau, only 17 companies or less than 10 per cent of the list of BSE 200 companies have a free float of less than 25 per cent.

So the move, which is in any case expected to be implemented over three years, is not going to result in many big-sized public offers or private placements.

In terms of attracting institutional investment, it may not make much difference as most of the top stocks in the country (over 90 per cent of them) already have a free float that's higher than 25 per cent.

In the case of some public sector undertakings though, the true picture of the free float may not be reflected because of cross-holdings. If Sebi decides to exclude cross-holdings while calculating free float, there may be more companies that fall short of the 25 per cent requirement.

The other thing about having a minimum free float requirement is that it directly affects other regulations governing delisting and initial public offerings (IPOs). For instance, most companies now have to file for delisting and make an open offer to remaining shareholders once the promoter holding crosses 90 per cent. This will have to be relooked at.

Similarly, for initial public offerings, companies need to issue just 10 per cent of post-issue paid-up capital. Again, if the aim is to have a 25 per cent free float, even the IPOs will have to be 25 per cent of the post-issue paid-up capital.

If this is applied for big-ticket IPOs that are slated to happen in 2004, the amount of paper available through public issues will be huge. Again, if the markets are not in the buoyant mood they are in currently, there may not be an appetite for many big-sized issues.

In a broad context, however, the markets will obviously be much healthier with a higher proportion of free float, simply because it improves liquidity and makes manipulation of stock prices more difficult.

L&T: Changing fortunes

Larsen & Toubro (L&T) has announced its plan to restructure its balance sheet after the demerger of its cement business. Post demerger, a shareholder with 100 shares in L&T would receive 50 shares (face value of Rs 2) in the engineering giant and 40 shares (face value of Rs 10) in the newly formed cement company, Ultra Tech CemCo.

Besides, L&T's paid-up share capital will reduce to Rs 24.8 crore, from Rs 248.7 crore. According to the company, much of the increase in share capital previously was on account of the cement business, which will be demerged and, hence, the reduced share capital.

However, the reduced share capital does not make any difference to the net worth of shareholders, which stood at Rs 3,562.6 crore as on March 2003. Post the demerger, L&T will have a net worth of Rs 2544.3 crore, while the newly formed cement company, Ultra Tech CemCo. will have a net worth of Rs 1018.3 crore.

Also, the post-demerger share capital of mere Rs 24.87 crore will not be a barrier for the company to bid for large projects in infrastructure, as the engineering and construction division still has a net worth of Rs 2,544.3 crore.

Since L&T will now be focusing only on its core competence of engineering, it's expected to get a better valuation. With demand surging, analysts point out that L&T's strong brand recognition will help it bag a large share of huge capital investment planned in the industrial sector. Besides, after the demerger of the capital-intensive cement division, L&T's interest burden will come down to a great extent.

With contributions by Mobis Philipose and Amriteshwar Mathur