MINIMUM PUBLIC SHAREHOLDING

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

Important points:

  • 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.
  • 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.

Concerns:

  • Investors, especially foreign ones, are wary of investing in such stocks due to absence of liquidity – because of high promoter holding.
  • 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.
  • 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.

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%.

Significance:

  • 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.

SEBI

  • SEBI is a statutory body established in April, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
  • The basic functions of the Securities and Exchange Board of India is to protect the interests of investors in securities and to promote and regulate the securities market.

SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT

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