Government raises minimum threshold for public shareholding in listed companies

The Government has increased the minimum threshold of public shareholding in listed companies to 25% for all categories. The condition of 25% minimum public shareholding has also been made uniformly applicable to both initial listing as well as for continuous listing. Vide a press release issued on June 4, the Government has notified the Securities Contracts (Regulation) (Amendment) Rules, 2010 (“Amendment Rules”), which amends the Securities Contracts (Regulation) Rules, 1957 (“Rules”). A copy of the Amendment Rules may be found here. As per the Amendment Rules, all listed companies will either require to be listed with a minimum public shareholding of 25%, or will be required to increase the public shareholding upto 25% in a phased manner by adding at least 5% annually to the public shareholding. This follows the announcement made by Mr. Pranab Mukherjee in the 2009-2010 budget along similar lines. The Government expects that the amendment will help sustain a continuous market for listed securities and provide liquidity to the investors. In addition, larger public shareholding is expected to reduce the scope for price manipulation by the promoters and result in more appropriate price discovery.

Existing Position

Prior to the notification of the Amendment Rules, while as a general rule every listed company was required to maintain a minimum public shareholding of 25%, however, certain categories of companies were allowed to maintain a minimum public shareholding of 10%. The categories included (a) the companies that offer or had in past offered 10% shares to the public in compliance with Rule 19(2)(b), and (b) where the number of outstanding listed shares of any class or kind of the company are twenty million or more and the market capitalization of such company in respect of shares of such class or kind is Rupees one thousand crores (i.e Rupees ten billion). Prior to the Amendment Rules, clause 19(2)(b) of the Rules stipulated the following conditions for less than 25% public shareholding:

a) minimum twenty lakhs (i.e. two million) securities (excluding reservations, firm allotments and promoters’ contributions) were offered to the public;

b) the size of the offer to the public; i.e. the offer price multiplied by the number of securities offered to the public was a minimum of Rupees one hundred crores (i.e. Rupees one billion); and

c) the issue was made only through book building method with allocation of 60% of the issue size to the qualified institutional buyers as specified by the SEBI

The Amendment

The Amendment Rules have modified the existing position in the following manner:

1. Subject to the exceptions listed below, as a general rule, any company listed on a stock exchange or intending to list on a stock exchange is required to have minimum public shareholding of 25%.

2. All listed companies that do not have at least 25% public shareholding as on the date of the Amendment Rules are required to add not less than 5% to the public shareholding every year until it reaches 25% level.

3. For every new listing, if post issue capital of the company calculated at the offer price comes out to be more than Rupees four thousand crores (i.e. Rupees Forty Billion), the company may be allowed to get listed with only 10% public shareholding. However, such company is also required to add minimum 5% to the public shareholding annually until the public shareholding reaches the stipulated minimum of 25%.

4. Companies whose draft offer documents are pending before the Securities and Exchange Board of India on the date of this amendment (i.e. June 4, 2010) are allowed to get listed with 10% public shareholding. However, such companies will need to increase their minimum public shareholding to 25% by adding at least 5% to the public shareholding annually.

5. A company may add less than 5% to the public shareholding in the year its public shareholding reaches 25% even by adding less than 5% to the public shareholding.

6. Subject to relaxations listed out in paras 2 to 5 above, the rule on public shareholding shall be uniform for the initial listing as well as continuous listing.

7. In the event the public shareholding in a listed company falls below 25%, the company is required to raise the public shareholding to 25% within one year from the date the public shareholding in such a company has fallen below the threshold of 25%.

8. The Amendment Rules have defined ‘public shareholding’ to mean equity shares held by the public, except the shares held by custodian against depository receipts issued overseas.