MUMBAI: India has proposed raising the minimum public shareholding or free float for listed companies to 35% from 25%, in a surprise move that triggered concerns about enforced share sales.
The proposal, made by Finance Minister Nirmala Sitharaman in her budget speech on Friday, pushed the stock market down, even though she also announced a tighter fiscal deficit target and lower-than-expected borrowing.
Expectations of a flood of shares being sold could result in a supply overhang for the market and undermine share prices, said analysts.
The need to increase public shareholding would result in companies having to offer approximately 1 trillion rupees (US$15 billion) in shares currently owned by controlling shareholders to the public, said Rajiv Singh, CEO of stockbroking at Karvy Stock Broking Ltd.
The government, however, did not say whether the higher free float would apply 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 affect close to 20% of all listed companies,” said Vivek Gupta, partner and national head of mergers and acquisitions and private equity taxation at KPMG in India. “That will need substantial capital - which may not be readily available.”
Major companies with large stakes held by either their founders or owners are the information technology giant Tata Consultancy Services Ltd and Wipro Ltd, the state-owned mining giant Coal India Ltd, and the 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, which tumbled 3.6%. The country’s IT index was down 2.5%.
Securities experts expect a strong pushback from Indian multinational companies in which private owners hold the vast majority of shares.
The controlling shareholders would be concerned about diluting their shareholding and, therefore, their controlling rights, said Moin Ladha, a partner at the law firm Khaitan & Co.
Maintaining a 25% free float is already 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 capitalization 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%.