ARTICLE
28 August 2019

Proposal For Minimum Public Shareholding To 35% In Listed Companies – Is India Ready?

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Luthra and Luthra Law Offices India

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The scenario of doing business in India has been undergoing change at fast-pace.
India Corporate/Commercial Law
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The scenario of doing business in India has been undergoing change at fast-pace. While the corporate sector was already facing increased pressure of raise in overall corporate governance norms given the pro-active enforcement of various regulatory bodies and spate of regulatory reforms, a proposal to increase the minimum public shareholding ("MPS") from 25% to 35% in listed companies as announced by the Hon'ble Finance Minister in her 2019-20 budget speech ("Budget 2019-20") does not seem to be something that the corporates are cheering about.

Brief statutory framework and historical background:

Currently, Regulation 38 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015 read with Regulation 19A of the Securities Contract (Regulation) Rules, 1957 ("SCRR") mandates listed companies to maintain MPS of 25%. The aforesaid MPS requirement has been brought into force through several securities law amendments. A uniform MPS limit of 25% for all listed entities, private as well as PSUs, was introduced way back in the year 2010 vide Securities Contracts (Regulation) (Amendment) Rules, 2010 dated June 4, 2010 ("First SCRR Amendment-2010"). The First SCRR Amendment - 2010 additionally provided that companies with less than 25% MPS should increase the public shareholding by at least 5% per annum until the limit of 25% was met. Thus, the timeline for achieving the MPS could vary for companies depending upon the quantum of their existing public shareholding.

Further, in about 2 months from First SCRR Amendment - 2010, amidst rising concerns from PSUs, SCRR was amended again vide Securities Contracts (Regulation) (Second Amendment) Rules, 2010 dated August 9, 2010 ("Second SCRR Amendment-2010") pursuant to which MPS limit for PSUs was reduced to 10%. Additionally, the requirement of mandatory annual increase of 5% of public shareholding was done away with and instead the companies were provided fixed time period of 3 (three) years for achieving MPS of 25%. However, for private sector companies, the fixed time period of 3 (three) years was to be counted from date of commencement of First SCRR Amendment – 2010 (i.e. till June 3, 2013), for PSUs the time period was to be counted from the date commencement of Second SCRR Amendment - 2010 (i.e. till August 8, 2013).

Subsequently, in the year 2014, the MPS for PSUs was restored to 25% vide Securities Contracts (Second Amendment) Rules, 2014 dated August 22, 2014 ("SCRR Amendment-2014") and a time period of 3 (three) years from the date of commencement of SCRR Amendment - 2014 (i.e. till August 21, 2017) was provided to PSUs to achieve the same. The aforesaid time limit was subsequently extended as under:

  1. Firstly, till August 21, 2018 vide Securities Contracts (Regulation) (Third Amendment) Rules, 2017 dated July 3, 2017 ("SCRR Amendment-2017"); and
  2. Thereafter, till August 2, 2020 vide Securities Contracts (Regulation) (Second Amendment) Rules, 2018 dated August 3, 2018 ("SCRR Amendment-2018").

Thus, in effect, PSUs have been provided a total time period of 10 years (from 2010 till 2020) to comply with MPS requirement. Set forth herein below is a table reflecting relevant timelines (for effecting MPS up to 25%) brought in from time to time by SEBI:

Amendments Private Sectors Entities PSUs
First SCRRAmendment-2010, dated June 4, 2010 Prescribed MPS limit: 25%
Timeline: No fixed timeline
(public shareholding was to be increased 5% annually until the limit of 25% was met)
Prescribed MPS limit: 25%
Timeline: No fixed timeline
(public shareholding was to be increased 5% annually until the limit of 25% was met)
Second SCRR Amendment-2010, dated August 9, 2010 Prescribed MPS limit: 25%
Timeline: June 3, 2010 (3 years from First SCRR Amendment - 2010)
(mandatory 5% annual increase in public shareholding omitted)
Prescribed MPS limit: Reduced to 10%
Timeline: August 8, 2013 (3 years from the Second SCRR Amendment-2010)
(mandatory 5% annual increase in public shareholding omitted)
SCRR Amendment-2014, dated August 22, 2014 No change Prescribed MPS limit: Restored to 25%
Timeline: August 21, 2017 (3 years from SCRR Amendment-2014)
SCRR Amendment- 2017, dated July 3, 2017 No change Prescribed MPS limit: 25%
Timeline: August 21, 2018 (4 years from SCRR Amendment-2014)
SCRR Amendment-2018, dated August 3, 2018 No change Prescribed MPS limit: 25%
Timeline: August 2, 2020 (2 years from SCRR Amendment-2018)

Methods specified by Securities and Exchange Board of India ("SEBI") for achieving MPS limit:

To facilitate listed companies to comply with MPS requirement, SEBI vide its circulars dated December 16, 2010, February 8, 2012, August 29, 2012 and February 22, 2018 specified following methods for complying with the MPS requirement:

  1. Issuance of shares to the public through prospectus;
  2. Offer for sale of shares held by promoters to public through prospectus;
  3. Sale of shares held by promoters through the secondary market subject to prior approval of the specified stock exchange1;
  4. Institutional Placement Programme in terms of Chapter VIII-A of then applicable SEBI (Issue of Capital and Disclosure Requirement) Regulation 2009;
  5. Right issues to public shareholders, with promoters/ promoter group shareholders forgoing their rights entitlement;
  6. Bonus issues to public shareholders, with promoters/ promoter group shareholders forgoing their bonus entitlement;
  7. Open market sale;
  8. Qualified institutions placement; and
  9. Any other method as may be approved by SEBI, on a case to case basis.

Implementation so far of the existing MPS limit of 25%:

Private sector companies: Upon expiry of June 3, 2013 (i.e. the deadline for private companies to achieve MPS of 25%), SEBI vide its interim order dated June 4, 2013 ("Interim Order") named a total of 105 companies which remained non-compliant despite of receiving repeated cautionary advice from SEBI to comply with MPS requirement. The non-compliant companies even included few of the major corporate players such as Adani Ports and Special Economic Zone Ltd., Tata Teleservices (Maharashtra) Ltd. etc.

Interim Order also included several directions against non-compliant companies such as freezing of voting rights and corporate benefits with respect to excess of promoter shareholding in the companies, prohibiting promoters and directors from buying, selling or otherwise dealing in securities except for purpose of complying with MPS requirement, restraining directors of non-compliant companies as well as the shareholders forming part of the promoter group from holding any new position as director in any listed company.

PSUs: As noted above, PSUs have in aggregate been provided a time period of 10 years to comply with MPS requirement (initially for meeting 10% MPS and then 25% MPS) and the recent extended time limit would be expiring on August 2, 2020. However, as per BSE PSU, a designated web portal of BSE Limited, as on June 30, 2019, a total of 26 (twenty-six) Central Public Sector Enterprises (CPSE), 1 (one) State-Level Public Enterprise and 7 (seven) Public Sector Banks (PSB) have to yet comply with the MPS requirement of 25%.

Probable impact of the increased MPS limit to 35%:

It has been seen in the past that by large the amendments to the relevant regulations applicable on listed entities are proposed after necessary deliberation at the SEBI board meeting. However, to industry's surprise, the extant proposal to increase MPS limit to 35% has come directly from the central government, Ministry of Finance. Unlike press releases of SEBI board meeting, the budget speech does not provide rationale or any other details of the proposal that has already given rise to spate of debates and concerns. As per media reports2, the recent concerns have in fact being coming from the corridors of the SEBI itself which has expressed its concerns regarding enforcement of 35% MPS requirement particularly for PSUs who have to yet comply with the extant requirement of 25%.

Further, while addressing a press conference after SEBI's board meeting held on August 21, 2019, it is understood that Mr. Ajay Tyagi, Chairman SEBI, asserted that SEBI currently is not in favor of MPS being hiked to 35% as certain issues (such as global practices, short and long-term implication of the decision, the quantum of money that will come to the market, current weaken status of IPO market) have to be further examined.3

Key issues in implementation of the proposal of MPS limit to 35%:

Liquidity Challenge - Demand & Supply Gap: The Budget 2019-20 budget has set a target of around INR 1,00,000 Crore of disinvestment for the financial year 2019-20. As of August 22, 2019, the government has achieved only INR 10,000 Crore4 of disinvestment for financial year 2019-20. This means that in next 7 months, disinvestment of around INR 90,000 Crore would have to be made to meet the target. Interestingly, the Budget 2019-20 also proposes to fund PSBs with INR 70,000 Crore Capital which would further increase government's holding in PSBs. While the subject proposal to increase MPS to 35% would aid government's disinvestment target, however, it has its downside as the same would create pressure on the market to absorb the excess public float. As per reported data, there are around 1100 listed companies which would have to level their public shareholding up to 65% which will result in off-loading of promoters' stake of around INR 4,00,000 crore. Collectively, all of the above factors, may create a huge demand and supply gap in the market which may eventually defeat the underlying intent of the proposal of 'better price discovery'.

The proposal may not be uniformly be applied to all companies: The enhanced limit of MPS may be achieved either through primary issuance or secondary sale of shares. Primary issuance may not be a viable option for cash rich companies as the surplus capital generated may not be required for meeting the commercial objectives of such companies. Such forced capital increase to just meet the compliance requirement may result in unnecessary hoarding of the capital which could otherwise be made available to cash starved companies. On the other hand, in case of secondary sale, there may not be enough takers for the promoter's stake particularly for companies with lower market capitalization. Further, a forced divestment, either through primary issuance or secondary sale, may result in false fluctuation in the price and which may not have any direct nexus with the performance or growth plan of the company.

Position under SEBI takeover regulations: Currently, the SEBI takeover regulations allow a promoter to acquire up to 75% shareholding of a company with permissible annual creeping acquisition up to 5%. Thus, a promoter who has already consolidated its shareholding to 75% by making calculated and substantial investment in a company in line with the extant SEBI takeover regime would be worst impacted with the proposal. Upon off-loading their stake to meet the enhanced MPS limit, the promoters may not fetch an equivalent value for their shares when compared with the acquisition price which they would have paid to acquire shares of the company. The promoters may not be thus willing to off-load their stake, instead would prefer to delist the company. They may, however, face challenges to successfully delist the company given the extant tightened delisting regulations, which may, thus, create a deadlock situation.

No effective further improvement in corporate governance: One may observe that the current regulatory framework for listed companies already has adequate checks and balance in place such as appointment of independent directors, restricting related parties from voting on transactions in which they are interested, disclosure of related party transactions etc. which ensures sound corporate governance. Therefore, the proposal to increase MPS limit may not likely to effectively improve the governance standards any further. In fact, a disbursed and scattered public shareholding, may even create undue difficulty in passing of special resolution for critical business decisions even when such business decisions are not having any adverse impact on the public shareholders.

Conclusion:

Learning from the past-experience where companies struggled to achieve extant MPS limit of 25% briefed herein above, the proposal to enhance MPS limit should be implemented only after due consultations with all stakeholders which should include laying out the proposed modalities and framework for implementation. This would enable the government to understand the roadblocks which the listed companies have been continuously facing in complying with the extant requirement of 25%. It would even allow the promoters, who may otherwise be averse to the proposal on the pretext of losing out the control or suffering financial losses, to understand, appreciate and connect with government's intent behind the proposal resulting in fuller and greater adherence to the requirement.

Footnotes

1. With respect to this method, SEBI vide circular dated February 1, 2012, to facilitate promoters to dilute / offload their holding in listed companies in a transparent manner and with wider participation, allowed offer for sale of shares by promoters through a separate window provided by the Bombay Stock Exchange and National Stock Exchange and provided guidelines for the same.

2.https://economictimes.indiatimes.com/markets/stocks/news/sebi-panel-worried-over-35-minimum-shareholding-plan/articleshow/70637027.cms?from=mdr
https://economictimes.indiatimes.com/markets/stocks/news/difficult-to-enforce-new-public-holding-rule-sebi/articleshow/70285963.cms

3. https://www.moneycontrol.com/news/business/markets/sebi-not-in-favour-of-hike-in-minimum-public-shareholding-to-35-4358841.html

4. http://www.bsepsu.com/#prettyPhoto[iframe]/8/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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