The Ministry of Finance has recently amended the Securities Contracts (Regulation) Rules, 1957 to exempt listed public sector enterprises from the requirement of holding a minimum percentage of public shares. This shift allows the government to provide exemptions to any listed public sector enterprise from adhering to the Minimum Public Shareholding (MPS) norm, which necessitates a minimum of 25% public float for all listed entities.
Reasons Behind the Amendment
This adjustment in the MPS framework is designed to simplify the process for sizable companies to launch Initial Public Offers (IPOs). It comes as the government is preparing for the IPO of Life Insurance Corp (LIC) of India, which is projected to be the largest listing in history.
Concerns Regarding Exemption from MPS Norm
Exempting public sector enterprises from adhering to MPS norms can result in negative impacts. For one, it can affect the liquidity in Public Sector Undertaking (PSU) stocks as foreign investors often hesitate to invest in stocks with high promoter holding due to the absence of liquidity.
Moreover, the maintenance of minimum public float by listed companies usually results in attracting higher foreign capital and increase India’s weight in international indices such as MSCI (Morgan Stanley Capital International) and FTSE (Financial Times Stock Exchange). Government firms avoiding these norms may negatively affect the inflow of foreign capital.
Impact on Strategic Disinvestment Program
Avoiding MPS norms could also undermine the government’s Strategic Sales Program in various PSUs including BPCL, Shipping Corporation, and Air India. The low free float is often a reason why PSU stocks have low valuations in the market.
Challenging Governance Standards
Several governmental expert committees have asserted that all listed entities, regardless of being private or governmental, should adhere to the same governance standards.
About Minimum Public Shareholding (MPS)
The MPS rule stipulates that all publicly listed companies in India should have at least 25% of their equity shares held by non-promoters or the public. The public shareholders can be individual investors or financial institutions who usually buy shares via public offer or secondary markets.
Compliance Status and Latest Amendment
Though the target timeline for achieving 25% MPS for listed companies was 2013, it had been extended multiple times, particularly for public sector companies. However, with this new amendment, the Central government gives itself the discretion to exempt selected public sector companies from the 25% MPS norm.
Significance of MPS
A suitable free float in a listed company is crucial for providing sufficient liquidity in trading stocks. This facilitates effective price discovery, maintains market integrity and ensures that there is lesser price manipulation in the stock.
The Role of SEBI
SEBI, established in April 1992, functions to protect investor interests in securities and promote as well as regulate the securities market.
Definition of Listed Companies and CPSEs
Listed companies refer to companies included on a given stock exchange allowing their stock to be traded. Central Public Sector Enterprises (CPSEs) are companies where the Central Government or other CPSEs hold 51% or more shares. As of March 2019, there were 348 CPSEs.
Understand the Role of a Promoter
Promoters are those who initiate a business idea, perform the necessary formalities required to start a company.
Primary Market and Secondary Market
The primary market is where new securities are created. Here, companies sell new stocks and bonds to the public for the first time, as in an Initial Public Offering (IPO). The secondary market is essentially the stock market, where these securities are traded.
Stock Liquidity
Stock liquidity refers to the ease with which a security can be bought or sold quickly in a secondary market. Investment liquidity affects the selling price and accessibility of cash when needed.
