India may see US$57 bil share sales on public float rule shift

Nirmala Sitharaman says companies must increase shares to a minimum of 35% from 25% in her maiden budget. (AFP pic)

NEW DELHI: Tata Consultancy Service and Hindustan Unilever are among at least 100 Indian companies that may need to sell shares worth billions of dollars after the government proposed to raise the minimum public shareholding.

Companies must increase shares held by the public to a minimum 35% from 25% at present, finance minister Nirmala Sitharaman said in her maiden budget, asking the market regulator to “mull” the proposal.

The rule may result in equity sales of about 3.9 trillion rupees (US$57 billion), creating a supply overhang on the market that’s trading near a life-time high, according to analysts including Centrum Broking.

The proposal may have another side-effect: it could prompt domestic units of multinationals, who don’t rely on local funding, to delist from exchanges.

“The detail to watch out for is the time allowed to meet this new rule,” said Rajiv Singh, who heads broking at Karvy Stock Broking.

“This will mostly impact multinationals and state companies, but in the long term, it will help get more retail money in equities.”

There are at least 40 state companies with public holding lower than 35%, he said.

Adequate liquidity

This isn’t the first time the government has forced founders to reduce their holdings to boost liquidity.

In June 2010, the regulator gave companies three years to ensure a minimum public float of at least 25%.

That spurred share sales of at least US$1 billion in June 2013 alone from companies including property developer DLF and JSW Energy.

Exchanges globally have also introduced free-float rules to ensure liquidity for investors in a publicly traded stock.

And index compilers such as MSCI take into account the percentage of shares available to investors when determining a stock’s representation in stock gauges.

Here’s a table showing some of the large companies that may have to sell shares when the proposal gets implemented.

“Timing and applicability need to be closely evaluated, we don’t want this to be another forced sale,” partner and national head at KPMG in India, Vivek Gupta.

Shares in Wipro slumped 4.2%, the most since March 8. Coal India slipped 3.7% and TCS ended 3.6% lower on Friday.

Here is what the analysts are saying about Sitharaman’s proposal.

Centrum Broking (Jagannadham Thunuguntla)

  • 25% of the total companies listed on Indian exchanges will have to offload stake to meet the new requirement.
  • The overhang of the proposal can have significant impact and thus regulator needs to provide sufficient time to meet the requirement.

IndiaNivesh Securities (Vinay Pandit)

  • The proposal if implemented can cause several changes in Nifty Index over the course of two years.
  • A lot of insurance and consumer companies will get investors attention due to the proposal.

KR Choksey Shares & Securities (Deven Choksey)

  • 167 companies in BSE 500 Index might have to sell shares and thus their stock valuations may come under check if the rule takes effect.
  • Proposals would also boost taxes for the government as 40 of the 167 companies will end up paying about 90 billion rupees in long-term capital gains tax at current prices

Deloitte India (Anil Talreja)

  • The proposal will be “fortifying the fundamentals of governance”
  • “There would be some clarifications expected including on grandfathering of existing situations”