Partial pragmatism

Dilution of stock dilution norms.

The government's move to give all listed companies more flexibility in meeting the goal of having at least a minimum proportion of their equity held by the public is welcome. However, the partiality shown to public sector undertakings (PSUs) is not. In addition, there could be a case for giving companies more time than the stipulated three years over which to meet the norm.

All listed non-PSU companies in which the shares held by the public and available for trading, the so-called float, is less than 25% of their total equity will no longer have to offload at least an additional 5% every year till they meet the norm of having a float of at least 25%. They can plan their stake sale to minimise the impact on share price of a predictable additional supply of shares.

Perhaps they could be given five years, instead of three, to meet the norm, to improve their flexibility. Indeed, many companies could well choose to comply early and at one go, to get rid of uncertainty over the share price. But that would be their choice.

The decision to relax the dilution norm from 25% to 10% for PSUs is a pragmatic move. Many PSUs are so large that the market just does not have the capacity to absorb the tonnes of stock all the PSU giants seeking to meet the dilution norms would dump on it. A 25% dilution norm would make it very difficult for PSUs such as Coal India and Bharat Sanchar Nigam, among others, to go public.

Also, assured, multiple, consecutive offers from each of these companies would certainly ensure the government, as the seller of shares, would not get a good price for its divestment. But what is the rationale for restricting this lower threshold to PSUs?

The rationale should be the size of the company, which would determine the market’s capacity to absorb its stake dilution without disruption. There are several listed entities in the private sector that too would qualify for a lower threshold. The insurance sector may also need a special treatment.
    
The 25% norm is a good long-term measure to develop equities market in the country. Destructive disruption would not help.