As part of the budget speech in July 2019, the Indian Finance Minister announced that the Government has asked SEBI to consider raising the minimum public shareholding (MPS) in Indian listed companies from 25% to 35%. This proposal (which, we understand, will mean a higher MPS requirement than in many other jurisdictions globally), allied with the Government’s move to also increase the public float in listed public sector undertakings, is expected to enhance India’s weightage in the global emerging markets index, which takes into account the free-float capital of the constituent companies. We expect SEBI to first come out with a detailed discussion paper on the proposal and invite public comments before implementing any changes.
Whilst we will continue to watch this space, there are a few potential implications to bear in mind if this proposal is indeed implemented:
- As in 2010 when the 25% MPS requirement was made uniformly applicable, we expect that SEBI will give listed companies and promoters some time – probably a couple of years – to comply with the new MPS requirement. However, in all likelihood, SEBI would again insist that the increase in public float is achieved through one or more of the specified methods in this regard. As things stand, promoters are allowed to sell a maximum of only 2% through open market sales to achieve the MPS, thereby restricting promoters’ ability to be opportunistic and take advantage of price fluctuations. The other methods involve either the promoter coming out with an offer for sale (through a prospectus or a SEBI specified process) or the company making a public issue / institutional placement or a rights / bonus issue in which the promoters do not participate. Any of these measures could potentially result in a fall in the stock price, at least temporarily.
- From a governance perspective, public shareholders will have enhanced participation in the affairs of listed companies. Whilst promoters with a ~65% shareholding would still be able to carry through most resolutions (including special resolutions requiring a 3/4ths majority, given that not all public shareholders participate in voting), approvals for related party transactions involving the promoter and other matters which require mandatory approval of the public shareholders (e.g., certain schemes of arrangement, delisting offers etc.) could potentially become more difficult. Also, companies which have two or more groups of promoters will likely see increased lobbying on the part of the individual promoter groups with the public shareholders, each vying for their support.
- If SEBI were to go ahead with this change, certain corporates, particularly Indian subsidiaries of MNCs, could be inclined to delist from the Indian stock exchanges, notwithstanding the legal and practical difficulties associated with SEBI’s delisting rules. It is worth noting that if the promoter shareholding is capped at 65%, it may become even harder for companies (and more expensive for promoters) to successfully delist from the stock exchanges. In addition to public shareholders having a greater say in approving delisting proposals, promoters will also need to purchase a higher chunk of shares from the public shareholders at the delisting exit price to get to the 90% threshold and successfully delist.
- Finally, it would be interesting to see whether, alongside the MPS increase, SEBI would also want to consider tinkering with the 25% threshold for triggering open offers under the Takeover Regulations. On the one hand, if the shareholding in listed companies were to become more dispersed, it would seem logical that the takeover trigger should be lowered. On the other hand however, it is worth recalling that the takeover trigger was actually increased from 15% to 25% in 2011 on the basis that a 25% shareholding (which enables a shareholder to block special resolution matters under the Companies Act) would provide de facto control. On balance, given the “sanctity” of the 25% threshold under the Indian corporate law regime, we believe that SEBI may not want to change that for now.
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