Public shareholding in listed companies increased to 25 Capital Market lawyers to be busy

The Government has made amendments to the Securities Contracts (Regulation) Rules by raising the threshold for public shareholding in the listed companies. The government has mandated listed companies to arrive at a 25 percent shareholding in the next three years.

The Government has made amendments to the Securities Contracts (Regulation) Rules by raising the threshold for public shareholding in the listed companies. The government through the Securities Contracts (Regulation) (Amendment) Rules, 2010, a copy of which can be downloaded here has mandated listed companies to arrive at a 25 percent shareholding in the next three years. The Finance Minister, Pranab Mukherjee in his budget speech had said that in order to increase transparency and manipulation the threshold limit of public shareholding has to be increased to 25 percent.

The press release by the Ministry of Finance listed out the salient features of the amendment:

1. The minimum threshold level of public holding will be 25 percent for all listed companies.
2. Existing listed companies having less than 25 percent public holding have to reach the minimum 25 percent level by an annual addition of not less than 5 percent to public holding.
3. For new listing, if the post issue capital of the company calculated at offer price is more than Rs. 4,000 crore ($833 million), the company may be allowed to go public with 10 percent public shareholding and comply with the 25 percent public shareholding requirement by increasing its public shareholding by at least 5 percent per annum. 
4. For companies whose draft offer document is pending with the Securities and Exchange Board of India on or before these amendments are required to comply with 25 percent public shareholding requirement by increasing its public shareholding by at least 5 percent per annum, irrespective of the amount of post issue capital of the company calculated at offer price. 
5. A company may increase its public shareholding by less than 5 percent in a year if such increase brings its public shareholding to the level of 25 percent in that year.
6. The requirement for continuous listing will be the same as the conditions for initial listing.
7. Every listed company shall maintain public shareholding of at least 25 percent.  If the public shareholding in a listed company falls below 25 percent at any time, such company shall bring the public shareholding to 25 percent within a maximum period of 12 months from the date of such fall.

Cyril Shroff, Capital Market head and Managing Partner, Amarchand Mangaldas, Mumbai speaking to CNBC TV 18 said:

“I think it has been hasty and somewhat abrupt. Whilst we did anticipate it from the budget announcement, the suddenness with which it came and without adequate public consultations, it’s going to throw the market bit into a spin. Some of the points that were just made, on does the market have enough depth to absorb so much more paper, what impact its going to have a new issue. These are some of the more structured questions that need to be considered. Over the next few days we are going to be debating them fairly, intentionally.

How is the dilution going to take place? There could be two methods either through the primary route or through the secondary route. If it was a primary route we have some basic issues to consider of how they will actually go about it, what is going to be the use of proceeds? Now there could be a number of companies, which need to do this, but have enough surplus cash, and if therefore they don’t have use of proceeds, how are they going to go to the market and sell so much more paper without having an application for it. You are forcing them to sort of to raise new paper in the company even though they don’t have a need for it.

If it is the secondary route, there are again issues in terms of are they going to do it through the private route or on the market. Then again you will have the same kind of questions that were just discussed. Does the market have the ability to absorb this and what impact it will have on the price? The last major point I would make in terms of just watching out for the details. So we are all reacting I think to the press release, but the devil is going to be in the detail in terms of the rules as they come out. The thing I would watch out for most is the definition of public, promoters and persons acting in concert. So how are for instance private equity investors or institutional investors going to be treated, how are promoter group going to be treated, how are the ADR’s going to be treated?

There is some ambiguity on whether they will be treated as part of public or not. So again calculation of the 75 percent and conversely the calculation of the balance 25 percent is going to be a lot of detail which I hope will come out in a sensible way. One can’t make out that from the pressure.”

Business reports indicate that many as 180 listed companies may have to tap investors for a cumulative sum of nearly Rs. 1.6 lakh crore ($35 billion) to Rs 2 lakh crore ($44 billion) to reach the 25 percent limit. This means that these listed companies will have an annual fund raise plan of atleast Rs. 65,000 crore ($14.6 billion) each year over the next three years. A March 2010 SEBI report mentions that in the recession year of April 2008-March 09, only 21 companies were able to raise Rs. 2,271 crore ($510 million). In 2009, 38 companies raised approximately Rs. 37,125 crore ($7.85 billion) through an IPO and 58 companies raised approximately Rs. 41,133 crore ($8.7 billion) through the Qualified Institutional Placement (QIP) process. Cumulatively these listed companies have raised 78,258 crore ($17.3 billion) during the last financial year.

Speaking to Bar & Bench, Gaurav Doshi, Vice President at Morgan Stanley said, “Most of the large cap stocks have a smaller promoter holding barring a few stocks. The history tells us that the stock markets get invested about Rs. 1 lakh crore ($22 billion) each year. Although the listed companies might find it difficult going along with the companies that are going in for their first time listing, in-terms of valuations and offer price, achieving 25 percent over the period of next three years is possible. The Finance Ministry’s amendment will reduce the probability of market manipulation by some promoters because of the large public shareholding”.

“There is still room for manipulation and structuring of the shareholding as some promoters will create off-shore entities and hold shares through the offshore account” said a Senior Associate capital market lawyer. “While the objective is novel, structuring these investments is possible as the amendment is yet to plug these loopholes”.

Currently the manner in which the companies can increase their public shareholding to 25 percent are through a follow on public issue (FPO), QIP, private equity or strategic sale. Some of the multi-national companies like BASF, Astra Zeneca and others who have a negligible percentage of public shareholding may even consider de-listing from the stock market as this rule many not make sense to these capital rich companies.

The investment bankers will be the biggest beneficiaries with this amendment followed by capital market lawyers. The average size of divestments over the last year, either through IPO / QIP / private equity averages at about $250 million (Rs. 1,125 crores). This means that the capital market lawyers have a minimum of 48 capital raising opportunities every year. Each capital raising opportunity, if it includes an International Legal Counsel (ILC) may involve 3 to 4 law firms. This means that law firms focusing on capital markets are bound to be hit by more work with nearly 144 transactional representation opportunities out of which 96 may be garnered by Indian law firms.

Currently, large Indian law firms average between 15 to 25 IPO / QIP transactions every year with an exception of Amarchand Mangaldas that concluded 67 such transactions last year.

Bar & Bench is compiling a detailed IPO / QIP market report with detailed interviews of Cyril Shroff, Managing Partner of the Mumbai office of Amarchand Mangaldas; Neeta Sanghavi, Country Counsel UBS; Manoj Bhargava, Parnter, Jones Day; Rajiv Gupta, Partner, Latham & Watkins. This report also contains our conversations with Madhurima Mukherjee, Capital Market Head at Luthra; Sangeetha Lakhi, Capital Markets Partner, Rajani & Associates and Abhimanyu Bhandari at Axon Partners. Watch out this space as we release the report later this week.