SEBI’s Relaxation on Minimum Public Shareholding Rules

The Securities and Exchange Board of India (SEBI) recently relaxed the Minimum Public Shareholding (MPS) norms for large companies at the time of initial public offerings (IPOs). It allows a minimum public offer of just 2.5 per cent at listing and grants up to 10 years to reach the 25 per cent MPS threshold. This move aims to facilitate IPOs by large issuers but raises questions on investor protection and corporate governance.

Context of SEBI’s Decision

SEBI’s relaxation intends to ease listing for large companies that may not require immediate fresh funds. These firms often raise capital privately from strategic investors and use IPOs mainly as exit routes. The rationale includes avoiding market oversupply and price pressure. However, the minimal public float at listing may affect share price discovery and investor confidence.

Categories of Companies Affected

The relaxation primarily targets large companies with financially strong promoters and private placements. It also includes some government-owned entities. These companies are less dependent on public funds and focus on visibility and liquidity benefits from listing rather than fundraising.

Impact on Public Investors

A public offer of only 2.5 per cent limits the equity available to retail and institutional investors initially. This small float may reduce market liquidity and impair price transparency. The long timeline to reach 25 per cent MPS could delay meaningful public participation and weaken minority shareholder influence.

Corporate Governance Concerns

Low public shareholding undermines minority shareholder rights and limits their ability to influence corporate decisions. Majority promoters retain dominant control, which may discourage minority investors from actively participating in governance. This scenario risks weakening accountability and oversight.

Market Growth and Depth

India’s capital market has grown rapidly, with market capitalisation rising from 81 per cent to 135 per cent of GDP since 2019. Demat accounts have increased to over 207 million. Despite this, SEBI’s argument of limited market depth as justification for relaxation is debatable given the strong IPO fundraising performance.

Regulatory Alternatives and Recommendations

Experts suggest a balanced approach—mandating at least 10 per cent public shareholding at listing with a shorter timeline to reach 25 per cent. Raising the MPS threshold to 30–35 per cent or increasing special resolution thresholds under the Companies Act could enhance governance. Replacing MPS with a uniform free float definition would better reflect shares available for trading.

Legal and Market Framework

The Companies Act requires 50 per cent approval for ordinary resolutions and 75 per cent for special resolutions. Even 25 per cent public shareholding may not fully protect minority interests. Shares held by related parties or government entities, though counted as public, often remain illiquid, weakening market dynamics.

Implications for Ease of Doing Business

While easing listing norms may support business growth, investor protection remains paramount. SEBI’s primary role is safeguarding investors, which calls for a careful balance between regulatory flexibility and maintaining market integrity and transparency.

Questions for UPSC:

1. Point out the significance of Minimum Public Shareholding norms in ensuring corporate governance and investor protection in India.
2. Critically analyse the impact of capital market reforms on the growth and depth of the Indian securities market with suitable examples.
3. Estimate the role of regulatory bodies like SEBI in balancing ease of doing business with investor interests in financial markets.
4. What is the concept of ‘free float’ in stock markets? How does it differ from Minimum Public Shareholding, and why is it important for market liquidity?

Answer Hints:

1. Point out the significance of Minimum Public Shareholding norms in ensuring corporate governance and investor protection in India.

1. MPS mandates a minimum percentage (currently 25%) of shares to be held by the public at listing, ensuring wider ownership.
2. It prevents promoter dominance, enabling minority shareholders to have a voice in corporate decisions.
3. MPS supports transparency and accountability by reducing promoter control and encouraging better governance practices.
4. Higher public shareholding improves market liquidity and price discovery, protecting investor interests.
5. It empowers minority shareholders with rights to approve resolutions and take legal recourse against oppression.
6. Relaxation in MPS can dilute these protections, weakening investor confidence and governance standards.

2. Critically analyse the impact of capital market reforms on the growth and depth of the Indian securities market with suitable examples.

1. Reforms like easing IPO norms and dematerialisation have expanded market participation (demat accounts rose from 36 million in 2019 to 207 million+).
2. Market cap to GDP ratio increased from 81% to 135%, reflecting deeper capital markets.
3. Strong IPO fundraising (4th largest globally in 2025) indicates investor enthusiasm and market maturity.
4. However, reforms relaxing MPS norms risk reducing liquidity and minority investor protection, potentially harming market quality.
5. Valuation challenges and price volatility post-IPO affect investor sentiment despite reforms.
6. Balanced reforms should promote growth without compromising governance and investor safeguards.

3. Estimate the role of regulatory bodies like SEBI in balancing ease of doing business with investor interests in financial markets.

1. SEBI facilitates capital raising by easing listing norms, aiming to support business growth and market development.
2. It must ensure investor protection through regulations like MPS, disclosure norms, and governance standards.
3. Relaxing rules (e.g., 2.5% public float) may ease business but risks investor confidence and market integrity.
4. SEBI’s primary mandate, per its Act, is safeguarding investor interests, which can sometimes conflict with ease of doing business.
5. Regulator should balance flexibility with robust safeguards, possibly via phased compliance or credible market studies.
6. SEBI’s role includes evolving market definitions (e.g., free float) and improving transparency to support both investors and issuers.

4. What is the concept of ‘free float’ in stock markets? How does it differ from Minimum Public Shareholding, and why is it important for market liquidity?

1. Free float refers to shares readily available for trading in the secondary market, excluding promoter holdings and locked-in shares.
2. MPS is a regulatory threshold mandating a minimum public shareholding percentage, which may include illiquid or strategic holdings.
3. Free float better reflects actual market liquidity than MPS, as some public shares may not be freely tradable.
4. Higher free float improves price discovery, reduces volatility, and attracts diverse investors.
5. Discrepancies in free float definitions across exchanges create inconsistency; regulator should standardize it.
6. Replacing MPS with free float criteria can enhance assessment of market depth and investor participation.