A good idea

Whose time hasn't yet come

The amendments to the Securities Contracts (Regulation) Rules requiring a minimum 25% public holding for all listed companies are a good long-term measure to develop equities market in the country.

It is designed to widen the base of ownership, deepen the market for every share and make its price less volatile.

Many more small investors could, in theory, get to share in the wealth creation by companies in a rapidly-growing economy. That said, a number of questions prop up.

Markets regulator Sebi had mandated such a move in 2006 and it came to nought. This time around, too, we don't know how the government plans to deal with non-compliance with the amended rules, as the press release is silent on penalties, if any.

The decision to apply the 25% rule across all sectors and to state-owned enterprises is a bold move.

But it could well make it impossible for some of our state-owned behemoths to ever go public. Sheer size would rule out 25% being divested in one go, say, for example, for Coal India. If the government divests 10% now, why should an investor pay a decent price for the stock when she knows that one-and-a-half times as many shares as are on offer now would be made available additionally over the next three years, depressing the value of the share? Can NMDC continue to divest stock on the scale required over the next three years? Perhaps, the government would have to make an exception for public sector enterprises.

Another sector that would seek to be exempted from the proposed regime is insurance joint ventures with foreign partners.

Since the foreign partner is unlikely to allow its stake to go below 26%, following the new guideline on dilution would mean the domestic partner diluting its stake to 49% over three years, losing a controlling majority.
    

The timing of the amendment also raises concerns: global and domestic equities are extremely volatile and may stay that way until the eurozone crisis eases. There are also concerns about the ability of retail investor to absorb the raft of papers that would come into the market.

The new directive presupposes large domestic institutional flows to the market, which are yet to materialise