Go easy on the public float rule

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The government seems in rethink mode over its budget decision to raise the minimum public shareholding in listed companies to 35% from 25%. This should come as a relief to equity markets, which have been worried about the impact that extra supply brought on by compliance would have on stock prices. This was among the reasons that markets slumped after the annual budget on 5 July.

The number of companies that would be affected by this proposal is also quite large. By some estimates, as many as 1,100 listed companies currently have a promoter stake of more than 65%; a reduction to the prescribed limit could entail as much as a trillion rupees worth of share sales. Plans of such a massive selloff within a short span of time would imply promoters would have to rush through the sales at low prices, since share prices are mostly in a slump. Besides, a slowdown in the economy and a pullout by foreign investors are also pressuring markets.

These render such share sales unsuitable for the time being. It would be advisable to defer the implementation of the proposal to another day, when the economy is in better shape. Also, instead of short deadlines, companies should be allowed a few years to comply so that fire sales are avoided. This way, promoters would get the best value for their shares. At the same time, it would ensure markets face the least disruption. New supply should be evenly spread out.

via LiveMint

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