Minimum public float: an analysis of amendments

By Subhayu Sen, Khaitan & Co

Listed companies are required to maintain a minimum “public float” or issue to the public as prescribed by rule 19(2)(b) of the Securities Contract Regulation Rules, 1957 (SCRR). This rule was recently amended to raise the minimum public shareholding of all listed companies from 10% to 25% of the post-issue paid up capital.

The public shareholding refers to shareholding of persons who are unrelated to those in control of a company (the promoters). The rationale for amending the rule seems to be that greater public participation in listed companies would reduce instances of corporate mischief and increase accountability. However, the amendment and consequent changes to the listing agreement have given rise to significant challenges in its implementation. This article discusses the specific challenges and suggests corrective action.

The amendment

A proviso in the amendment allows companies with a post-issue share capital of ₹40 billion (US$887.8 million) or more to dilute less than 25% but more than 10% of the post-issue paid up capital. Such companies must increase their public float to 25% within three years from the date of the issue. Further, all existing listed companies with less than 25% public float are required to increase the same to at least 25% within three years of the amendment.

Subhayu Sen Associate Khaitan & Co
Subhayu Sen
Khaitan & Co

As a result of the amendment, the requirement that a company with a 10% public float allot at least 60% of its public offering to qualified institutional buyers (QIBs) has been removed. Companies now need to allot a minimum of 50% of the issue size to QIBs only if they fail certain tests linked to the financial performance of the company.

The amendment also made it necessary to revise the existing equity listing agreement. The agreement includes enabling clauses that lay down the modes for increasing the public shareholding, which comprise a divestment of the promoters’ stake to the public, either though an offer for sale through a prospectus or the secondary market, and a follow on public offering.

However, if the promoters prefer a sale through the secondary market, a prior approval of the stock exchanges is mandated.

While allowing a sale in this manner, the stock exchange may specify any conditions it deems necessary. The nature of these conditions that may be imposed by the stock exchanges for allowing such sales is unclear, in the absence of precedents.

Implementation difficulties

Although the rationale for the amendment is clear, its implementation appears difficult. While recently there has been a plethora of follow-on public offers, it may be difficult for companies to dilute the promoters’ holding as the fund requirement is usually need-based.

In addition the financial conditions of a company may deter any offers for sale that it makes. Moreover, as there are a large number of listed companies with less than 25% public shareholding, the market may not be able to absorb the flood of equity issues that will result.

More importantly, in the event that a controlling shareholder chooses to divest his holding through an off market sale, the company runs the risk of being taken over through the open offer process if the thresholds prescribed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, are breached. Consequently, selling shares to a single or an identified group of shareholders may not be an avenue used by companies or their promoters to meet the requirements of the amendment.

A solution?

The aggressive time period prescribed for compliance with the amendment is arguably the biggest roadblock to its implementation. The sudden increase of the public float to 25% by all listed companies that are non-compliant with rule 19(2)(b) of the SCRR, seems unrealistic. As such, a revision of the time period for compliance with the amendment should be considered.

Another suggestion would be to relax the stringent application of the amendment for those companies that meet certain eligibility parameters. These parameters could be the absence of any significant investor complaints or regulatory action and compliance with corporate governance norms and other good governance requirements over a period of time.

Irrespective of the nature of the discussion, immediate action is necessary to revise the amendment so as to stabilize an immature market and ease the burden on companies that operate within such a market.

Subhayu Sen is an Associate at Khaitan & Co in Mumbai. Khaitan & Co is a full-service law firm with offices in Bangalore, Kolkata, Mumbai and New Delhi.


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