Minimum Public Shareholding

Q  Why is it in News ? 

A The Ministry of Finance has amended the Securities Contracts (Regulation) Rules, 1957 to exempt listed public sector companies from the minimum public shareholding norm.

Q What are some details about this Amendment ? 

A 

• About The Amendment:
  
  • The government can now exempt any listed public sector enterprise from the Minimum Public Shareholding (MPS) norm, which mandates at least 25% public float for all listed entities.
• Rationale to the New Amendment:
• The framework for the MPS has been revised to make it easier for large companies to launch IPOs (Initial Public Offers).
• The move comes as the government prepares for the IPO of Life Insurance Corp (LIC) of India, likely to be the biggest listing ever.

Q What are concerns with this Amendment ? 

A 

• Concerns:
• Can Affect Liquidity in PSU Stocks:
• Investors, especially foreign ones, are wary of investing in such stocks due to absence of liquidity  because of high promoter holding.
• Can Impact Foreign Investment:
• Maintenance of minimum public float by listed companies helps attract higher foreign capital and increases India’s weight in international indices like MSCI (Morgan Stanley Capital International) and FTSE (Financial Times Stock Exchange).
• Government firms not adhering to these norms could be a drag on inflow of foreign capital.
• Can Impact Strategic Disinvestment Program:
• This can be detrimental at a time the government is planning Strategic Sales in various PSUs including BPCL, Shipping Corporation, and Air India.
• Low free float is one of the reasons why PSU stocks command low valuation in the market.
• Non-Uniform Governance Standards:
• Various government expert committees have in their reports argued all listed entities, government or private, should be treated at par on governance standards.

Q What is Minimum Public Shareholding ? 

A 

•  About Minimum Public Shareholding (MPS):
• The MPS (also called free float) rule requires all listed companies in India to ensure that at least 25% of their equity shares are held by non-promoters, i.e. public.
• Public shareholders could be individual or financial institutions and they normally buy shares through public offer or secondary markets.
• In order to bring more transparency in the working of listed companies, the concept of minimum public shareholding was introduced.
  • In 2010, SEBI amended the Securities Contracts Regulation Rules to insist on this 25% public float for private sector companies.
• The average promoter holding in India is among the highest globally.
  • In the 2019-20 Budget, the government had proposed to increase the minimum public float from 25% to 35%.

Q What has been the compliance status ? 

A 

• Compliance Status:
• While the timeline for achieving 25% MPS for listed companies was 2013, the timeline for public sector companies i.e. PSUs and public sector banks (PSBs), were extended multiple times closer to the deadline due to lack of efforts from such companies towards compliance.
  • The previous such extension granted them time till 2nd August, 2021 for compliance.
• With the latest amendment, the Central government has empowered itself to exempt selected public sector companies from the 25% MPS norm.

Q What is significance of Minimum Public Shareholding ? 

A 

• Adequate free float in a listed company is essential for providing sufficient liquidity in trading stocks thereby facilitating efficient price discovery and maintaining market integrity.
• Public float ensures that there is lesser price manipulation in the stock.
• Forcing promoters to relax their grip on listed companies can improve corporate governance by giving public shareholders and institutions greater say in corporate actions.
  • There are very few investment opportunities in the stock market and so forcing promoters to sell shares would improve the supply of shares.