Public holding floor may finally hit 25% to ensure transparency

NEW DELHI: Taking a cue from the Satyam scam, the government is planning to revive a proposal that seeks to ensure that every listed company has 25% of its ownership reserved for the public.

The proposal looks to remove the exemption now enjoyed by IT, infrastructure, entertainment and communication companies to stay listed with 10% public shareholding, subject to conditions.

The government���s reading is that a large public shareholding would serve as a check on managements.
���The proposal needs to be seen in a new light. We will put out the paper in public domain and seek stakeholders��� views in the wake of issues brought forth by recent developments,��� the official said.

According to stock exchange data, on an average, public holding of a company is just 13% although 35% is reserved for them at the public issue stage because the term public includes entities that are not necessarily public in nature.

The government had said in May 2008 that if public means non-promoters and includes foreign institutions, FIIs, mutual funds, employees, NRIs and overseas corporate bodies as well as private corporate bodies, then the floating stock would be insignificant.

Therefore, one option before the government is to redefine the term public and ensure that 25% is exclusively reserved for the public. If the existing definition is retained, the 25% threshold may be raised in a way that ensures public shareholders do not lose their opportunity to take part in a company���s fortunes.

The primary concern with low public holding is that the number of shares available for trading is low. This causes volatility in prices and could lead to price manipulation as it is easier to corner shares. A company can list with as little as 20 lakh shares if certain conditions are met.

The government had unveiled a discussion paper in February 2008 that had suggested a minimum 25% public holding limit for listed companies. However, it was put on hold after the stock markets fell following the global financial turmoil.

The government now does not want to wait for the markets to enter a bull phase to implement the proposal as the issue now is about listed companies having transparent ownership structure, the official said. Such a move would also reduce volatility in the market by reducing concentration of shares in a few hands.

The discussion paper had also proposed that if public holding falls below 25%, the promoters, management and the company might be jointly and severally be liable to bring it to 25% within three months or face action, including delisting. However, the thinking, subsequently in the ministry has veered around to the view that promoters should be given substantial time, 3-5 years, to dilute their stake to comply with the norm.

Most countries have similar norms for minimum public holding. The UK has a minimum 25% public holding requirement for companies that have a market capitalisation of less than ��100 million. It selectively allows lower limits for companies with higher market cap.

Singapore has a similar tiering. The NYSE in the US, on the other hand, requires a certain minimum number of shares to be issued to the public.