India proposes higher minimum public shareholding in listed companies

MUMBAI (Reuters): India proposed raising the minimum public shareholding required in listed companies to 35% from 25%, in a surprise move on Friday that triggered concerns there will be a lot of enforced share sales.

The proposal by Finance Minister Nirmala Sitharaman in a budget speech pushed the stock market down, despite India announcing a tighter fiscal deficit target and lower-than-expected borrowing.Expectations of a flood of shares being sold could provide a supply overhang for the market and undermine share prices.The need to increase public shareholding would result in companies having to offer approximately 1 trillion rupees ($ 15 billion) in shares currently owned by controlling shareholders to the public, said Rajiv Singh, CEO of stock broking at Karvy Stock Broking Ltd., a financial services firm.

The government, however, did not say whether the public shareholding hike would be applicable to existing listed firms or only to those seeking to list. Nor did it provide a timetable.

“If it is made applicable to existing listed companies, we estimate that this will perhaps impact close to 20% of all listed companies,” said Vivek Gupta, partner and national head of mergers and acquisitions and private equity taxation at accountants KPMG in India.

“That will need substantial capital – which may not be readily available,” Gupta added.

Push back

Major companies which have a large shareholding held by either their founders or owners are information technology giant Tata Consultancy Services Ltd. and Wipro Ltd., state-owned mining giant Coal India Ltd., and consumer products group Hindustan Unilever Ltd. among others.The broader Nifty index closed down 1.14% at 11,811.15, dragged down mainly by Tata Consultancy Services Ltd. that tumbled 3.6%. The country’s IT index was down 2.5%.

Securities experts expect a strong push back from multi-national companies in which private owners own the vast majority of shares.

The controlling shareholders would be concerned about diluting their shareholding and, therefore, their controlling rights, said Moin Ladha, partner at law firm Khaitan & Co.

Maintaining a 25% public shareholding has already been difficult and increasing it to 35% will be challenging, he said. “This proposal will have to be implemented in stages with reasonable exemption in specific cases.”

Some companies might even consider accelerating their plan for delisting from the markets, Ladha added.

According to Karvy’s Singh, 100 of the BSE 500 companies that capture the bulk of the market capitalisation in BSE Ltd. are more than 65% owned by their controlling shareholders. Government holdings will also be affected as 40 state-run companies have public shareholdings of less than 35%.