REQUIREMENT OF PUBLIC HOLDING FOR LISTING

Ministry Of Finance has proposed to amend the listing norms

by which promoters would be required to dilute their stake to
75% and below to remain listed. The government has also
proposed to take away SEBI’s power to grant exemptions to
certain companies on their listing requirements as part of
the amendments to the Securities Contracts (Regulation)
Rules, 1957 (SCRR).

While the idea of a larger public float was mooted to make

markets deeper and help reduce price manipulation, its
impact needs to be carefully analyzed, as its implications
can be manifold on both company and the stock market.

FICCI on the basis of inputs from its member

companies has tried to bring out some of the concern
issue that need thorough examination before
implementation of the rule.

1. Minimum Public float and inclusion of all

foreign holding as public floats in various
countries:

Analysis

a. As can be seen from the table 1(Annexure I), there

is a difference in practices followed elsewhere and
the proposed changes in India- Fixed percentage
public float requirements in India vs minimum
market cap or flexible percentage public float for
various levels of market cap with discretion in the

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 hands of the Regulators abroad. This removes the
level playing field for listing in India vs listing
overseas.

b. Currently ADR/ GDR holding is excluded from the

definition of public float in India and the proposal
contemplates excluding all Institutional and
foreign holdings also. In all the other countries
except Hong Kong and South Korea, ADR/ GDR is
included in the definition of public float. If this
proposal of MOF is considered, India will be the
first country to exclude all holding by financial
institutions and Mutual funds from minimum public
holding calculations. Exclusion of Institutional
holding/ FII will hamper Institutions/ FIIs to invest
in a company even though the current FEMA
regulations permit upto 100% foreign holdings in
line with Foreign Direct Investment (FDI)
regulations in most sectors. The proposed changes
will go contrary to the existing FEMA regulations
on foreign holding in Indian companies. Further,
FI's and MF's represents a large base of investors/
stakeholders. Similarly FII's represent a large base
of stakeholders (eg. pension fund) abroad. Since
they represent large base of investors and
stakeholders, FI's, MF's and FII's should in any
case be included in definition of 'public'.
c. The proposed regulations will result in FIIs and
financial institutions who may be asked to exit the
stock of a particular company to meet the
minimum Public holding percentages. As a result,
there could be a huge impact on the market price
and the small investor could suffer losses in the
absence of a potential buyer in the market.

d. The proposal compares the Public holding of

13.35% in NSE listed companies with 35%

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 reservation for Retail investors in an IPO. The
current requirements of SEBI for public offer are
minimum 10%/ 25% should be the public float post
the IPO. The public offer is further broken into
reservation for retail - 35%, Non institutional
investors- 15% and QIBs 50%. So if a company is
making an offer of 10% of its equity, the eventual
holding in the company post IPO will be retail 3.5%
(35% of 10%), Non Institutional investors- 1.5%
(15% of 10%) and QIBs 5% (50% of 10%). So it is
incorrect to compare 35% reservation for Retail
investors with the final Retail holding in the
company post IPO and listing of 13.35%. The
denominator is different for both calculations. If a
comparison is made of top 984 odd listed
companies in India, 799 companies will fail the
test of 25% retail shareholding. Most of the
companies forming part of the sensex will also fail
the test. A detailed break up of public
shareholding of the top 984 companies is
enclosed. The data is as per latest available
shareholding is as of December 31, 2007.

Recommendation

a. The proposed regulation in India should be

removed
or
the Regulator (SEBI) should have the flexibility
to exempt companies that have a large market
cap and the Regulator can set a norm for
defining the size of this market cap.
b. ADRs, FII, MF and FIs holding should be
included in the definition of public float as in
the US, UK, Singapore and Japan
or

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 the Regulator should include ADRs FII, MF and
FIs in the definition of public float but can
grant the Regulator the power to prescribe a
ratio of ADR/ foreign float to domestic float or
thresholds for non institutional domestic
holding that must be maintained. This ratio
could be either a percentage of the total float
or a pre-defined market cap of the net float.
This would prevent misuse by companies,
which are seeking to list with a minimal
domestic public float but large FII/ ADR/GDR
holdings.
c. In the event that a restrictive definition of “
public “ is adopted: mechanism should be
provided under the Securities Contracts
(Regulations) Rules (SCRR) for controlling that
the shareholding of other non-promoter
shareholders, remains within permitted
limits to no impinge on 'public' shareholding.
The company should be allowed to fix the
limits for each category and the concerned
body under SCRR should regulate the limits
being adhered to. With electronic trading, it is
not possible for companies to monitor
limit. The company can not be put to costs of
maintaining required 'public' shareholding
because of some other non-promoter limit
being exceeded nor can the promoters be put
to unfair position of diluting their
shareholding.
or
For existing listed companies, methodology
should be provided to reduce the
shareholding of other non-promoter
shareholders within limits fixed by the
company. They may be required to
proportionately sell their holdings to 'public'
shareholders.

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 2. For a company to be listed and continue to be
listed, it must have a public stake of 25%.

Recommendation
a. The current level of minimum 25% non-
promoter shareholding for continuous listing
should be continued. (ie. promoter can have
shareholding of upto 75%) The public stake
should be included within this overall limit of
minimum 25%.

3. Additional disadvantage to Indian listed

companies – Indian Depository Receipts (IDR) Rules

Analysis

Indian companies will be at a disadvantage vis a vis foreign

companies seeking to issue Indian Depository Receipts in
India under the proposed Companies (Issue of Indian
Depository Receipts) Rules, 2004.
The Government of India has issued the Companies (Issue of
Indian Depository Receipts) Rules, 2004 permitting foreign
companies to issue IDRs in India provided certain conditions
are satisfied like - Turnover of US $ 500 million and Capital
and reserves of US $ 100 million. SEBI’s DIP guidelines
(chapter VI A) on issue of IDRs provide for Rs 50 crores as
the issue size for issue of such IDRs. The rules do not

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prescribe a minimum public float as a percentage of the
shares of the foreign issuer.
When an overseas company lists its IDRs it would give such
overseas companies more liberal norms for listing in India
than the local Indian companies. For e.g. companies like
Cognizant Technologies or even Microsoft could make an
issue of Indian Depository Shares (against underlying foreign
shares) without meeting any listing norms of Indian
Regulations that are currently being proposed for the Indian
companies.
Internationally, the listing requirements for local companies
and foreign companies issuing depository receipts are
similar except for minor differences as evidenced by the
rules in US.

Recommendation

a. The IDR Rules 2004 should be the benchmark for

the proposed norms on Indian companies and the
minimum public float so that foreign issuers and
domestic companies are at par.
4.Capital Requirements

Analysis

Public issue by a company depends on various factors one of

them being the fund requirements from time to time.
Some companies may have higher fund requirements than
others. Similarly the ability to go for a high gearing in their
Balance Sheets depends on the ability of companies to
borrow or raise equity. No two companies can be same on
this parameter and hence to bracket ‘same size fits all’ by
applying 25% public holding cannot be made applicable to
all companies.

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Recommendation

The distinction between companies should consider

factors like companies having a low requirement of
public funds and higher portion of their requirements
through debt and others who have a higher
proportion of funds through equity and low
proportion of funding through debt and some
companies falling in between. If a minimum public
offer is still required to be maintained then the
recommendation could consider a slab system as
explained above or have flexibility with different
industries having different thresholds.
This will also lead to a healthy comparison of a public
float of a company listing now with a public float of
an existing listed company.

5. Proposal to ask companies to increase the public

holding within 3 months

Analysis

The proposal to make companies to increase the holding to

25% within 3 months is too short for any listed company.
The increase in public holding by companies can be done by
the following ways-
a. By offer for sale through an IPO
b. By direct sale by promoters in the stock market
c. By issue of fresh shares in the market by the company
d. By way of buy back of shares by the company

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Any of the above steps involve lot of regulatory and
shareholder approvals involving time and cannot be
completed in 3 months time. Moreover, the timing should
also coincide with favourable market conditions failing which
the investors will end up losing money due to such dilution.

Recommendation

It is recommended that the time for companies to

increase their holding to minimum percentage of
public holding should be longer and the current
requirement of 2 years as per clause 40A of the
listing agreements needs to be restored.

6. SEBI’s discretionary powers proposed to be

removed

Analysis

SEBI, being a regulator of stock markets, has been given the

power to regulate and prescribe rules from time to time for
the orderly functioning of the market and for investor
protection. That being the aim of SEBI Act passed by
Parliament, the proposal to take away that freedom of the
regulator goes against the purpose of creating SEBI.
Indian securities market is still evolving and has come a long
way from the liberalization days of 1991. However, during
this phase of growth and liberalization, there were many
instances when SEBI took corrective action as it had the
required power to do so. The relaxation given to IT
companies initially and then the relaxation of minimum
public float being reduced to 10% has helped the investors

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to invest in blue chip companies who would have otherwise
decided not to list their shares in case a higher threshold
had been prescribed for listing for such companies. Financial
Supervisory Authority (FSA) in London has powers to give the
required flexibility in determining public floats and is similar
to authority currently given to SEBI.

Recommendation

It is recommended that SEBI, being the securities

market regulator be continued to be vested with the
power to prescribe the thresholds for minimum public
holding.
It is requested that these aspects are taken care of
before any final changes in the regulation are
effected.

ANNEXURE I

Table 1
BENCHMARKING WITH THE WORLD

Country Minimum Public Minim Mini Mini

Public float float um mum mum
% age includ Marke Outst numb
es t cap andin er of
foreig g share
n share holde
holdin s (in rs
gs etc Millio
n)
USA None Yes US $ 1.1 2200

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(NYSE) 100 Mn
USA None Yes US $ 2.5 5000
(NYSE) – 100 Mn
for Non
US
compani
es ADRs
USA None Yes US $ 1.1 400
(NASDA 75 Mn
Q)
USA None Yes US $ 1.1 400
(NASDA 75 Mn
Q)- for
Non US
compani
es-
ADRs
UK 25% with Yes BP 700 - -
public if Mkt K
cap is below
BP 100 Mn
Lower % age
for certain
categories as
approved by
FSA, London
(Generally for
Market cap BP
100 Mn and
above a public
float of lower
than 25% can
be
considered)
Note : BP-

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 British Pounds
Singapo Upto a market Yes S$ 80 - 1000
re cap of S$ 300 Mn in all
Mn, the public cases
float will be
25%
20% between
S$ 300 to 400
Mn
15% between
S$ 400 to S$
1000 Mn
10% above S$
1000 Mn
Japan None Yes Jap Yen 1.0 300
1000
Mn
HongKo Normal- 25% No HK $ - 1000
ng Market cap > 200 Mn
HK$ 10 Bn-
15%
South Normal- 30% No KRW 1.0 1000
Korea No of shares 7.5 Bn
> 500 Mn-
10%
Luxemb Normal- 25% Yes Euro 1 - -
ourg Lower than mn
25% if in view
of the large
number of
shares of the
same
category and
the extent of

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 their
distribution to
the public, the
market will
operate
properly with
a lower
percentage.
India Presently 10% ADR Rs - -
exclud 1000
ed Crores
Proposed 25%

Propos
al to
exclud
e all
Institut
ional
and
foreign
holding
s

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