To set 25 pct public equity float is tough task for India

equity

India faces an uphill task to reimpose a rule requiring listed companies to have at least a 25 percent public float, with resistance seen from controlling shareholders in private sector firms.

The finance ministry’s effort to bring in a uniform public float minimum comes after a similar push by the capital markets regulator was waylaid by the collapse in markets last year.

Market players say reimposing a minimum float is a good idea but would work only if it were rolled out gradually in order to prevent flooding the market with shares.

A total of 174 firms would need to offload stakes worth roughly 1.61 trillion rupees ($33 billion) if the minimum float rule was imposed, a study by deal tracking firm SMC Capitals showed. Of that, 28 state-run firms, primarily in energy, steel and banks, account for 83 percent.

By comparison, Indian firms have raised $10 billion in share sales so far this year, surpassing the $7.2 billion raised in all of 2008, according to Thomson Reuters data.

PROPOSAL TO HELP PLUG SHORTFALL

India, facing its highest fiscal deficit in 16 years, can use the sale of stakes in government companies to meet the shortfall. A minimum float rule would mean the sale of larger stakes in state firms than might otherwise be considered.

The mandatory share of huge blocks of stock could also be a boon to investment banks managing the sales.

Finance Minister Pranab Mukherjee noted in his July 6 budget speech that the average public float in Indian firms was less than 15 percent.

“Deep, non-manipulable markets require larger and diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as public sector companies,” he said.

Recent media reports have said the finance minister has approved a minimum public float plan in phases from 2010/11.

There will be pulls and pressures especially from some private sector firms but this time the authorities are banking on pulling it off given the government finances,” said Arun Kejriwal, director at research firm KRIS.

However, several market insiders were sceptical of the plan’s success, given the huge amount of stock the market would need to absorb, as well as the reluctance of controlling shareholders to trim their stakes.

“It is just impractical from an execution point of view. India just does not have the capacity,” said a top executive at a foreign investment bank. He did not want to be named given the sensitivity of the matter.

The Securities and Exchange Board of India tried implementing the 25 percent rule in phases from 2006 on firms with a market value of under 10 billion rupees ($204 million).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: