Increasing minimum public shareholding will have long-term positive impact on companies share valuation and share market

[CA DEV KUMAR KOTHARI]

Announcement of increasing public holding:

At present in case of listed companies minimum requirement of public holding is 25% that means up to 75% shares can be held by promoters/ management group. Many companies had earlier higher promoters stake, therefore those companies had to reduce promoter’s stake. Some companies who could not reduce promoters stake and could not increase stake of public, had to get shares delisted after complying with necessary procedures. In fact, in many cases,  due to very conservative approach and  policies of promoters companies could not increase public holdings.

However, we find that the companies who could come out of policy constraints of promoters (to hold maximum shares in management group) and increased public holding could perform better. This is because by way of

1. selling of shares by promoters to public , promoters  got funds available or
2.  by issue of shares to public, companies got capital and
3. in case a mixed approach of (a) and (b) methods, was followed, both promoters and company got additional capital.

 Increased  capital available in hands of company and / or its promoters increased investible funds by way of promoters contribution, and increased capacity to raise further capital by way of share capital or by way of borrowings and therefore , could do better by expansion, setting up of new business. Therefore, increasing public holding is also instrumental to growth, if one can avail the opportunity.

On other hand conservative promoters who did not reduce their holding, could not increase fiscal capacity and therefore could not expand business also, which they could have, if they resorted to reducing their stake in company and allowed more public to participate in investment in their companies.    

From budget speech of FM:

32. It is right time to consider increasing minimum public shareholding in the listed companies. I have asked SEBI to consider raising the current threshold of 25% to 35%.

From this statement it is clear that government is trying to induce growth orientation in corporate sector. Though it is also being considered, by a section of people associated with share markets that this is  a step to mobilize funds by government by way of disinvestment in public sector listed companies.

However, for that it is not necessary to statutorily require to increase public holding. Because any promoter, including government, is free to transfer their shares to public.   Need to enforce increased public holding is because some promoters are not interested to divest their stakes.

Will have positive impact:

As discussed earlier, on increasing public holding company and / or promoters have more funds as capital in their hands. This increases further capacity for fund raising, therefore, company and its promoters can expand business and can also improve profitability.

One fear in this regard is that when promoters divest their stake, number of shares available in market will increase in technical terms floating stock will increase and that can bring down price of shares. For a short-term this may be true, however once shares of companies are purchased by people who have long-term investment policy, these will not be available in market. In that situation, shares held by such long-term investors will be a positive factor in increasing price of shares. Increased public holding will also make management of companies more alert on aspects of corporate governance, compliance, and investor service. All these add to the value of corporate and consequently to value of shares.

 Therefore, increasing requirement of at least 35% public holding in case of listed companies will go a long way in improving prospects of such companies and their promoters.