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6/29/13 SEBI cracks the whip - The Hindu

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Opinion Columns C.R.L. Narasimhan

Published: June 9, 2013 21:52 IST | Updated: June 10, 2013 03:44 ISTFINANCIAL SCENE

SEBI cracks the whip

C. R. L. Narasimhan

It has not taken very long, after the expiry of the deadline, for the capital market regulator, the Securities andExchange Board of India (SEBI), to crack the whip on companies that have not complied with the minimum publicshareholding.

The stipulation that companies already listed on the exchanges should ensure that the public shareholding should nobe below 25 per cent is not some arcane stuff, of concern only to market professionals and company secretaries. Bothfor corporate issuers as well as for investors of all kinds, the SEBIs moves culminating with its interim order of June4, 2013, are extremely significant.

In June 2010, the rules were amended to provide for minimum and continuous public shareholding of 25 per cent inprivate listed companies. The deadline was June 3, 2013, on which date some 100-odd companies were found to be

non-compliant. The regulator is now proceeding against them.

Restrictions

SEBI has directed freezing of voting rights and corporate benefits of promoter groups with respect to the excess ofproportionate shareholding till such time they comply. Restrictions have been put on their dealing in the non-compliant shares and in becoming directors in other companies.

The larger issue is to examine the rationale of any minimum public shareholding requirement. Should there be anysuch stipulation at all?

Obviously, it affects corporates as well as their investors.

For the corporates, it could be a question of having greater control over the company. A large, diversifiedshareholding could cost the company more.

For the retail shareholder, the larger the public shareholding, the greater the chances of owning the share.

Besides, a large float might lessen the chances of stock manipulation by promoters and reduce volatility.

Challenges

For the regulator, striking a balance between the often conflicting motivations of the corporate issuer and the investohas posed challenges over the past few decades. With financial sector reform, and subsequently the entry oftechnology companies in the stock market, there have been other points to support the claims of the company as welas the investor.

It would be appropriate to examine the context of the SEBIs recent moves to better appreciate its significance.

Over the years, the relative proportions of shares to be held by the promoters and the public have been fixed by the

government and the SEBI.The 75:25 rule was not always sacrosanct. For a long time, until the early 1990s, company promoters could hold nomore than 40 per cent of the paid-up capital, thus making them minority shareholders from day one.

The balance 60 per cent was to be held by the public.

Only in some rare cases, usually when a government-owned development agency was the co-promoter, could thecombined promoters shareholding go beyond 50 per cent and that too after making a special application to thegovernment.

Needless to add the arrangement of promoters starting out as minority shareholders was most unsatisfactory. Thequestion of control loomed large and often led to sharp practices to shore up promoters share.

In days where the new public issues market was in doldrums, with very little public interest, reserving almost two-

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7/27/2019 SEBI Cracks the Whip - The Hindu

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6/29/13 SEBI cracks the whip - The Hindu

www.thehindu.com/opinion/columns/C_R_L__Narasimhan/sebi-cracks-the-whip/article4797815.ece?css=print

thirds of the issue for public did not make much sense.

Reform era

In the reform era, the emphasis shifted dramatically to vesting with promoter groups a much larger share. In techcompanies, the motivations have been to preserve control and keep the price high.

Shares became the new currency to fund acquisitions. Besides, potential acquirers will think twice before bidding fothe company. High market prices also make ESOPs that much more attractive and help in retaining employees.

The 75:25 rule is for the present confined to the private sector. While companies having a genuine difficulty might b

given extra time, it is doubtful whether, at the end of the day, retail investors really stand to benefit.Two new models

SEBI had given ample time to the companies to comply. It even introduced two new methods the Offer for Sale(OFS) and the Institutional Placement Programme (IPP) to speed up the share divestments. In all these, however,retail investors have not been in the picture at all.

So, the minimum shareholding is welcome, but its full benefits will be reaped over time.

narasimhan.crl@thehindu.co.in

Keywords: SEBI, Financial Scene Column, minimum public shareholding, India financial sector, InstitutionalPlacement Programme, Offer for Sale, MPS norms, market regulator

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