आर्थिक कार्य विभाग DEPARTMENT OF Economic Affairs

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Requirement of Public Holding for Listing

DISCUSSION PAPER

REQUIREMENT OF PUBLIC HOLDING FOR LISTING

Rationale

1. A large number of shares distributed among a large number of shareholders is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. The larger the number of shares and the number of shareholders, i.e., the larger the public float, the less is the scope for price manipulation. For example, if the promoters are entitled to, say, 90% of the stock, it may result in concentration of shareholding upto 90% in the hands of a select few and the consequent shrinkage of floating stocks in the secondary securities market. Given the imperfections inherent in the securities market, this could make the security susceptible to price manipulation to the prejudice of the interests of the investing public and defeat the prime objective of the SCRA of preventing undesirable transactions in securities. Moreover, the larger the public float, the more effective is the instrument of listing as a tool for redistribution of wealth in the country. The minimum public float provides an opportunity to the general public to have a share in the increased wealth generated by the competitive private enterprise and prevents cornering of the benefits flowing from the policies of the Government and public institutions by a handful of promoters. These are the considerations behind the requirement of minimum public offer/ float under the SCRA. On the other hand, any requirement of too high a level of public float discourages closely held well-run profit making companies from going public. While the promoters want the benefits of listing, they are generally averse to giving a large share in the capital/ control to the public. A very high level of public float also acts as disincentive to private enterprises. It is, therefore, desirable that the promoters are not only allowed to have a reasonable minimum stake, it should be insisted upon them to accept and retain a reasonable minimum stake in the capital of the company on a continuous basis to demonstrate their interest. The policy challenge is to balance the interests of the promoters and of the public.

2. A minimum offer is generally prescribed at the time of initial listing while a minimum float is prescribed for continued listing. These are also relaxed in the public interest. These are prescribed in terms of a percentage of issue size, number of securities or value of securities or any combination of these three. The prescription in terms of the value of public offer has no meaning in view of the high volatility in the prices of the securities in the market. The initial offer price of Rs. 100 per share could reduce to Re. 1 reducing the value of offer to public from Rs. 100 crore to Rs. 1 crore for an issue size of 1 crore shares. The prescription in terms of number of shares similarly has no meaning, as the shares do not have any fixed face value or market value. The percentage prescription is even hazier. 25% in a company may mean a public offer of Rs. 92 crore, while the same percentage in another company can mean Rs. 10334 crore. As no single measure is adequate, a combination of these three is desirable and needs to be applied at the stage of initial listing as well as for continued listing. It must, however, still be borne in mind that the volume of transactions in a particular security in a day can be any multiple of the floating stock and no amount of floating stock can be an effective insurance against price manipulation. Effective surveillance and enforcement mechanism and legal framework are necessary to fight the menace of price manipulation.

Legal Framework

3. The Securities Contracts Regulation Act, 1956 (SCRA) seeks to prevent undesirable transactions in securities. In order to achieve these objectives, the Central Government has framed the Securities Contracts (Regulation) Rules, 1957 (SCRR). The SCRR provides for the requirements which shall be complied with by public companies for the purpose of getting their securities listed on any stock exchange. One requirement seeks to ensure the availability of a minimum portion/number of shares (floating stock) of the listed securities with the public so that there is a reasonable depth in the market and the prices of the securities are not susceptible to manipulation. The SCRR seeks to achieve this by prescribing a minimum part of the issue to be offered to public by the company seeking listing on a recognized stock exchange. The listing agreement entered into by the company with the stock exchange requires the former to ensure minimum non-promoter holding on a continuous basis. Administrative guidelines issued by the government and the regulator also endeavour to ensure reasonable floating stock in the market and avoid concentration of stock in a few hands.

Historical Perspective

4. Prior to September 1993, Rule 19 (2) (b) of the SCRR required a minimum public offer of 60% of the issued capital of a company for getting listed on a recognized stock exchange. The securities taken or agreed to be taken by the Governments or select financial institutions, up to a maximum of 11%, could form part of 60% of the public offer. It empowered the stock exchanges to relax this requirement, with the previous approval of the Central Government, on being satisfied that the securities sought to be listed were not unduly concentrated in a few hands. It also empowered the Central Government to waive or relax the strict enforcement of any or all of the requirements with respect to listing prescribed by the SCRR. Depending on the circumstances, the minimum size of the public offer was being relaxed frequently by means of administrative guidelines. A variety of relaxations was granted to FERA companies, new companies with foreign/NRI equity participation, etc., while a variety of further requirements such as minimum issued capital, minimum public offer in terms of face value, minimum number of public shareholders, etc., were prescribed. Relaxations were granted for individual companies on a case-by-case basis as well as for classes of companies. A major relaxation was granted by permitting non-FERA companies incorporated in India at least ten years prior to the date of the listing application or companies with a profit-earning record for at least four out of the five years prior to the date of the listing application to get listed on a stock exchange with a public offer of at least 40% of the issued capital. Besides, such public offer, at the option of the company, could be made in two stages, viz., the first 20% at the time of initial public offer and the balance within three years of the date of listing on the recognized stock exchange. Thus, companies were allowed listing on the condition that they would make the second stage offer within three years to increase the public holdings to 40%. It was a different matter that there was no proper mechanism to monitor if the companies actually made their second offer within three years of enlistment.

5. Rule 19 (2) (b) was amended on September 20, 1993 by which the minimum public offer by a company for getting listed on a stock exchange was brought down to 25% from the earlier norm of 60% or such other percentage as was admissible under the guidelines of the Government. This was done to encourage the listing of a large number of companies to broaden the market. The securities taken or agreed to be taken by the Governments or select financial institutions did not form part of the 25% of the public offer. It restricted the power of the stock exchanges to relax this requirement only in respect of a Government company with the previous approval of the Central Government (SEBI from December 1996). It also empowered the Central Government (SEBI from December 1996) to waive or relax the strict enforcement of any or all of the requirements with respect to listing prescribed by the SCRR.

6. As the authorities had powers to relax the requirements of listing, they were first persuaded to relax the minimum public offer requirement for information technology (IT) companies. The arguments in favour of the relaxation generally were: (a) Since the IT stocks were usually high value stocks, 25% of the capital could be a huge sum which these companies did not require; (b) many of the promoters of these companies are first generation entrepreneurs who were not willing to allow as high a public holding as 25%; and (c) these companies, in the absence of relaxation in Rule 19 (2) (B) may raise the resources in the overseas market which would be a loss to the Indian investors. In exercise of its powers to waive or relax strict enforcement of any condition of listing, SEBI laid down a different set of requirements of listing for companies in the IT sector. It prescribed in 1999 that an IT company could be listed if:

(a) at least 10% of securities issued by the company were offered to the public;

(b) at least twenty lakh securities were offered to the public (excluding reservation, firm allotment and promoters’ contribution); and

(c) the size of the net offer to the public (i.e., the offer price multiplied by the number of securities offered to the public, excluding reservation, firm allotment and promoters’ contribution) was at least Rs. 50 crore.

Subsequently in April 2000, SEBI laid down this set of listing requirements in respect of the companies in the media (including advertisement), entertainment and telecommunication sectors, subject to the condition that not less than 75% of the company’s revenue and profit emanate from these sectors.

7. While the initial listing requirement was being modified, there was no means to actual holding by public. Based on anecdotal evidence, thinking started to prescribe minimum float on continuous basis. An attempt was made in 2001 to rationalise the initial listing requirements by amending SCRR and prescribe continuous listing requirement and disclosure of shareholding pattern through listing agreement. For the first time, SEBI, vide its circular dated 2nd May, 2001, directed stock exchanges to amend Clause 40A of the listing agreement to provide that the company shall maintain, on a continuous basis, the minimum level of non-promoter holding at the level of public shareholding as required at the time of listing. However, where the non-promoter holding of an existing listed company as on 1st April, 2001 was less, the company shall, within one year, raise the level of non-promoter holding to at least 10%, or it has to buy back the remaining shareholding and get delisted. Since the listed companies were required to maintain the public shareholding at a level that was required at the time of initial listing, the minimum public shareholding requirement varied in accordance with the provisions applicable at the time of initial listing of the company.

8. On reconsideration, SEBI decided to revise these provisions and issued a press release in August, 2005. It stated that all listed companies would be required to maintain at least 25% shareholding with public for the purpose of continuous listing. However, the companies, which were permitted to make an Initial Public Offer with at least 10% offer to public, shall maintain at least 10% public holding. While this decision was yet to be implemented, SEBI reconsidered the issues further and issued a circular on 13th April, 2006 (which came into effect on 1st May 2006) amending the listing agreement to streamline continuous listing requirement.

Current Provisions

9. The SCRR as amended in 2001 and the listing agreement as amended by SEBI Circular of 2006 now provide the initial and continuous listing requirement.

9.1 Initial Listing Requirement: The SCRR now provides that a public company seeking listing of its securities on a stock exchange is required to satisfy the exchange that at least 10% of each class or kind of securities issued by it was offered to the public for subscription. The amended Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957, provide that a company seeking listing on a stock exchange shall offer:

(i) at least 25% of each class or kind of securities to the public for subscription,

Or

(ii) at least 10% of each class or kind of securities to the public for subscription subject to the conditions that:

a. minimum 20 lakh securities are offered to the public,

b. the size of the offer to the public is a minimum of Rs.100 core, and

c. the issue is made only through book building method with allocation of 60% of the size to the qualified institutional buyers.

The stock exchanges can, however, relax listing requirements for a Government company. The securities taken or agreed to be taken by the Governments or select financial institutions do not form part of 10% or 25%, as the case may be, of the public offer. With this amendment, SEBI withdrew the special dispensation for select sectors. But it can still waive or relax the strict enforcement of any listing requirement under the SCRR.

9.2 Continuous Listing Requirement: The listing agreement now provides:

(i) The following companies shall maintain the minimum level of public shareholding at 10%:

a. a company which offers or has in the past offered at the time of initial listing less than 25% but not less than 10% of the total number of issued shares of a class or kind, and

b. a company where the number of outstanding listed shares is two crore or more and the market capitalization of such company in respect of shares of such class or kind is Rs.1000 crore or more.

(ii) In all other cases, the company shall maintain public holding of at least 25%.

The requirement of continuous public shareholding, however, does not apply to government companies, infrastructure companies and companies referred to BIFR. If a company does not comply with the relevant level of public shareholding as stated above or fails to comply with it at any time in future, it shall increase public shareholding to the relevant level within 2 years. It can increase the public shareholding by issuance of shares to public through prospectus, offer for sale of shares held by promoters, sale of shares by promoters in minority shareholders. The public shareholding for this purpose would comprise of shares held by entities other than promoters and promoter group and share held by custodians against which depository receipts are issued overseas

9.3 A cross country comparison of initial and continuous listing requirement is given below:

S. No. Country IPO Continuous Listing
1. Singapore 25% of Public Shareholding if Market Capitalisation is in excess of S$ 300 Million

20% of Public Shareholding if Market Capitalisation is in excess of S$ 300 to but less than 400 Million

15% of Public Shareholding if Market Capitalisation is in excess of S$ 400 but less than 1000 Million

12% of Public Shareholding if Market Capitalisation is in excess of S$ 400 but less than 1000 Million
10% held by Public
2. Hong Kong 25% Public Float or between 15% to 25% if Market Capitalisation is over HK$ 10b 25% Public Float or between 15% to 25% if Market Capitalisation is over HK$ 10 b
3. London 25% Public Holding 25% Public Holding
4. Nasdaq (Capital Market 1.1 million Publicly held Shares* 0.75 million Publicly held Shares*
5. Nasdaq (Capital Market 1 million Publicly held Shares* 0.5 million Publicly held Shares*
6. NYSE (Worldwide) 2.5 million held Shares*
NYSE (Domestic) 1.1 million held Shares* 1.1 million Publicly held Shares*

* Publicly held shares is defined as total shares outstanding, less any shares held by officers, directors or Beneficial Owners of 10% or more.

10. The companies now disclose the share holding pattern. The shareholding pattern of NSE Listed Companies as presented below indicates that Indian public hold about 13% of the capital, despite reservation of 35% for retail at the public issue stage:

Category As on 30/06/2007
FIIs 10.53
Mutual Funds 3.21
Other Domestic FIIs 5.93
VCFs 0.42
Other Institutions 0.28
Corporates 5.60
Indian Promoters 48.35
Foreign Promoters 6.97
Indian Public 13.35
Others 3.30
Shares against Depository Receipts 2.05
TOTAL 100.00

Proposal

11. With this background, it is proposed to provide for both initial and continuous listing requirements in the following manner:

(a) The standards for initial listing and continued listing may be prescribed in the SCR Rules.

(b) The standards for initial and continuous listing may be uniform, as the objective is same.

(c) The public offer envisaged at initial listing is of no consequence unless the public are actually allotted shares. The SCRR may speak in terms of allotment to public, not just public offer.

(d) As of now, the word ‘public’ is not defined. If ‘public’ means ‘non-promoters’ and includes FIs, FIIs, MFs, employees, NRIs/OCBs, private corporate bodies, etc., the floating stock would be insignificant. A view needs to be taken on this.

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

(f) If for any reason, the public holding reduces below 25%, the promoters, management and company may be jointly and severally be liable to bring the public holding to 25% within 3 months, in the manner prescribed by SEBI, failing which appropriate enforcement action, including delisting, may be taken.

(g) There should not be any discrimination between a Government company and non-Government company. The powers of the stock exchange to relax any of the conditions of listing with the prior approval of SEBI in respect of a Government company needs to be withdrawn. Similarly, the powers of SEBI to relax listing requirements may be withdrawn.

Public Comments

12. It is proposed to amend the Securities Contracts (Regulation) Rules, 1957 (SCRR) to make provisions to implement the proposals as suggested at Para 11 above. The comments on these proposals are invited by 28th February, 2008 at shuvom2002[at]gmail[dot]com.

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