It is significant to note that the government's about-turn on the 25% minimum public float proposal happened without any public opposition from corporate India
In the 1990s, finance ministry mandarins proudly declared that they didn’t understand capital markets. Apparently, nothing has changed. In the first week of June, the finance ministry did an embarrassing about-turn on two major issues. First, finance secretary Ashok Chawla stated on 9th June that the government was open to ‘review’ the new rules regarding minimum 25% public float. This was just five days after the new rules were notified, without gauging the consequences and opposition or even formulating a strategy to sequence divestment and ensure compliance.
The second is the about-turn on how to resolve the turf battle between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA). This has happened after two months of enormous confusion and panic among investors and distributors. It is part of a series of such thoughtless actions that have seen India’s retail investor population shrinking from 20 million in the early 1990s, when we embarked on economic liberalisation, to just eight million in 2010 (according to the Swarup Committee).
Let’s look at the 25% float rule. To have a larger public float is certainly in investors’ interest, provided retail investors are actually interested in buying these shares. Retail subscription patterns in recent IPOs (initial public offerings) suggest the need for enormous introspection on this front. More importantly, corporate India does not want this 25% float and it is the holy cows of our corporate world—the information technology (IT) companies and public sector undertakings (PSUs)—that will lobby the hardest for it. In fact, reduction in public shareholding for a group of listed companies to 10% is responsible for the fabulous notional wealth of our IT titans such as Infosys, Wipro, HCL Technologies and others. A low float allowed them minimal dilution and high valuation; more importantly, it has ensured high stock prices and market capitalisation ever since. A 25% dilution, even at 5% a year, is bound to erode their notional wealth significantly. Remember, each of these privileged captains of industry has extracted significant value by selling small blocks of their expensive shares to fund new businesses, personal assets and some philanthropy.
From the retail investors’ perspective, it is significant to note that the about-turn in the government’s stance happened without any public opposition from corporate India. It reveals the powerful influence of those who persuaded the government to get finance secretary Ashok Chawla to say that the government was ‘open to a review of the new rules’. It shows that corporate India now has so much influence over the government that it does not even feel the need to oppose policy publicly. After what happened in the US, this is something we need to worry about.
Further, when asked about what penalty was proposed for companies that failed to comply with 5% disinvestment, the finance secretary said, “Delisting is the biggest penalty.” It only underlines his ignorance about the capital market. Delisting penalises minority shareholders more than it penalises recalcitrant management or promoters. Were such a move contemplated, investor outrage alone would ensure inaction. Can you imagine the BSE or the NSE daring to delist a Wipro or a National Mineral Development Corporation (NMDC) if it fails to offer 5% of its shares to the public in the coming year?
But even without corporate pressure against dilution, it was ridiculous for the government to notify the new rules in the first place, without any thought about the market’s ability to absorb additional shareholding. According to Crisil, 179 listed companies would need to dilute their shareholding which, at current prices, would require them to raise Rs1,60,000 crore. In any case, the dilution plan and increased supply of shares itself would have led to a decline in secondary market prices of these shares in the run up to the offer. — Sucheta Dalal