Exempting select PSUs from minimum free float norm reverses govt stance

Relevance: Changes to minimum public shareholding norms and consequent impact

Synopsis: Recently, the Department of Economic Affairs has amended the Securities Contract (Regulation) Rules, 1957 (SCRR).

Background

Through a recent notification in the government gazette, the Department of Economic Affairs has amended the Securities Contract (Regulation) Rules, 1957 (SCRR).

• The amendment states that the “Central government may, in the public interest, exempt any listed public sector company from any or all of the provisions of the rule” of increasing minimum public shareholding to 25%.
• The current MPS of 25% came into effect in 2013. The 2019 Union budget proposed to raise this to 35%.

What is MPS?

Minimum public shareholding (MPS) is the minimum level of public holding (other than promoters) in a company to be maintained on a continuous basis.

Need for MPS

• For bringing better public ownership of the PSUs.
• Bring greater commercial and market orientation of the listed PSUs.
• Adequate free float in a listed company is essential for providing sufficient liquidity in trading stocks thereby facilitating efficient price discovery and maintaining market integrity.

Rationale behind the move

• The timeline for public sector companies, PSUs and public sector banks (PSBs), was extended multiple times closer to the deadline due to lack of efforts from such companies towards compliance.
• The previous such extension granted them time till August 2, 2021 for compliance.
• Of 1,705 listed private sector companies on the NSE, only 2 were non-compliant with MPS requirement as of June-end.
• In contrast, during the same time, 27 of 77 public sector companies on the NSE had public shareholding less than 25 per cent. Of them, 11 companies have public shareholding of less than 10 per cent.

Possible Implications:

• First, sections in the government and market participants feel the move would affect liquidity in PSU company stocks, dissuade institutional investors and may even have a bearing on the disinvestment programme.
  • Low free float is one of the reasons why PSU stocks command low valuation in the market.
  • This can be detrimental at a time the government is planning strategic sales in various PSUs including BPCL, Shipping Corporation, and Air India.
• Second, the Securities and Exchange Board of India’s (Sebi’s) rules requires companies to pay a structured fine for every day of non-compliance.
  • While private sector companies have to still comply with norms, the government has now created a carve out for PSUs.
• Third, maintenance of minimum public float by listed companies helps attract higher foreign capital and increases India’s weight in international indices like MSCI and FTSE.
  • Government firms not adhering to these norms could be a drag on the inflow of foreign capital.

Instead of having various kinds of exemptions for PSUs, it may be worth considering having completely separate regulations governing listed PSUs as PSUs are audited by the CAG and are answerable to Parliament.

Terms to know:

• SEBI
• Securities Contract (Regulation) Rules, 1957 (SCRR),