Finance minister (FM) Pranab Mukherjee’s Budget speech has again raised the issue of increasing public shareholding in listed companies. The FM correctly says that it is easy to manipulate share prices when public shareholding is not diversified and below 15%. This is true of public sector entities (ONGC, MMTC, NDMC, etc), where the public float is outrageously low, as well as several private companies such as DLF, which ensure that retail holding is just a shade above the minimum mandatory requirement. SEBI mandates a 10% public float for large-capital companies or in certain specified sectors and 25% for others. This is down from the 40% minimum public float that used to be mandated in the 1980s. Pranab babu is not the first FM to be concerned about low public float in listed companies; but previous attempts to correct this have been successfully thwarted by powerful corporate lobbying. This happens mainly because finance ministers worry about market manipulation only when stock prices collapse at the end of a bull market.
Even last year, there was a suggestion that public shareholding of all companies be increased to 25% by asking companies to increase floating stock by 3%-5% every year until it reached the 25% minimum float. Yet, SEBI didn’t even work towards this by disallowing companies such as DLF, which already have a low floating stock, from making a desperate buyback offer to maintain its stock price.
In December 2002, the then FM, Jaswant Singh, had assured the Rajya Sabha that listed companies would be asked to increase floating stock to 25%; as usual, this was after a scam when the market was down. Nothing came of it, although a commitment to Parliament is supposed to have great sanctity. In 2005 too, SEBI had made noises about raising the mandatory floating stock to 25%; at that time, it disallowed further creeping acquisition by promoters whose shareholding had touched 55%. But, soon after, investment bankers began to lobby for the inclusion of ADR and GDR issues in the definition of what constitutes public holding. Fortunately, nothing came of that; otherwise companies may have been listed on Indian bourses with negligible retail holding in India. That move was clearly aimed at helping companies to make follow-on issues at a huge premium.
Now again, Indian companies have discovered another big advantage of keeping high promoter-holding excessively high. When stock indices began to shoot up in what seemed like a new bull market since early March, companies which had high promoter-holding quickly mopped up money through QIPs (qualified institutional placements). When the system is so stacked in favour of large promoter-holding, can Pranab Mukherjee force companies to increase public holding? We certainly hope so. Greater public shareholding will, indeed, make price manipulation difficult and will also ensure that retail investors get shares at a fair price during follow-on issues.