SEBI's Relaxation on Minimum Public Shareholding (MPS)

The Securities and Exchange Board of India (SEBI) has recently decided to relax the Minimum Public Shareholding (MPS) requirement at the time of listing, providing longer timelines for large issuers to meet regulatory thresholds. This decision is primarily aimed at facilitating initial public offerings (IPOs) by large companies, based on the rationale that substantial dilution is challenging for the market, companies may not need more funds, and that immediate dilution can lead to an oversupply of shares. 

Key Features of SEBI's Decision

• Large companies are allowed a minimum public offer of only 2.5% at listing, with up to 10 years to reach the MPS threshold of 25%.
• Typically, companies in this category include government-owned entities and those with financially strong promoters capable of private placements.
• The regulatory relaxation may not lead to corporate governance improvements or fair treatment of new investors through IPOs.

Concerns and Criticisms

• Critics argue that companies should aim to meet the 25% MPS requirement immediately at listing to ensure transparency and fairness.
• The difference in share price discovery between a 25% dilution and a 2.5% dilution over a decade is significant.
• Current trends highlight a growing Indian capital market, with a market cap-to-GDP ratio increase from 81% to 135% since 2019 and a rise in demat accounts from 36 million to over 207 million.
• Despite market growth, inadequate depth is insufficient justification for MPS relaxation.

Implications for Corporate Governance

• A mere 2.5% public shareholding offers limited influence in company decisions, compromising the efficacy of minority shareholder rights.
• The overwhelming majority of promoter holdings may deter minority shareholders from making rational decisions.

Recommendations

• SEBI should enforce a 25% MPS at listing, possibly relaxing to 10% with a 2-3 year period to reach 25%.
• Companies should consider restructuring to meet MPS requirements, potentially through subsidiary listings.
• A study on market appetite could support phasing IPO issuances based on rational principles.

Corporate Governance and Shareholder Resolutions

• The Companies Act, 2013, mandates 50% shareholder approval for ordinary resolutions and 75% for special resolutions, suggesting the current MPS may not prevent promoter misbehavior.
• The 2019 Budget proposal to increase MPS to 35% was countered by free-market proponents citing market maturity.
• A potential increase in the MPS requirement to 30% or raising the threshold for special resolutions to 80% under the Companies Act is suggested.

Free Float Concept

• A higher public shareholding does not guarantee more shares in the secondary market.
• The concept of "free float" should replace MPS to better assess share availability for trading.
• SEBI should establish a consensus on "free float" definition among stakeholders.

The suggestions might challenge the "ease of doing business," but protecting investors remains SEBI's primary responsibility, as defined in the SEBI Act's preamble. The author, a former SEBI chairman, emphasizes these are personal views.