Nirmala Sitharaman, India's finance minister, gestures as she speaks during a news conference in New Delhi, India, July 5 2019. Picture: T NARAYAN/BLOOMBERG
Nirmala Sitharaman, India's finance minister, gestures as she speaks during a news conference in New Delhi, India, July 5 2019. Picture: T NARAYAN/BLOOMBERG

Mumbai — India proposed raising the minimum public shareholding required in listed companies to 35% from 25% in a surprise move on Friday that triggered concerns there will be a flood of enforced share sales.

The proposal by finance minister Nirmala Sitharaman in a budget speech pushed the stock market down, despite India announcing a tighter fiscal deficit target and lower-than-expected borrowing.

Expectations of large number of shares being sold could provide a supply overhang for the market and undermine share prices.

The need to increase public shareholding would result in companies having to offer about 1-trillion rupees ($15bn) in shares owned by controlling shareholders to the public, said Rajiv Singh, CEO of stock broking at Karvy Stock Broking, a financial services firm.

The government, however, did not say whether the public shareholding hike would be applicable to existing listed firms or only to those seeking to list. Nor did it provide a timetable.

“If it is made applicable to existing listed companies, we estimate that this will perhaps impact close to 20% of all listed companies,” said Vivek Gupta, partner and national head of mergers and acquisitions and private equity taxation at accountants KPMG in India. “That will need substantial capital, which may not be readily available,” he said.

Major companies that have a large shareholding held by either their founders or owners are information technology giant Tata Consultancy Services and Wipro, state-owned mining giant Coal India and consumer products group Hindustan Unilever among others.

The broader Nifty index closed down 1.14% at 11,811.15, dragged down mainly by Tata Consultancy Services, which tumbled 3.6%. The country’s information technology index was down 2.5%.

Strong pushback

Securities experts expect a strong pushback from multinational companies in which private owners own the vast majority of shares.

The controlling shareholders would be concerned about diluting their shareholding and, therefore, their controlling rights, said Moin Ladha, partner at law firm Khaitan & Co.

Maintaining a 25% public shareholding has already been difficult and increasing it to 35% will be challenging, he said. “This proposal will have to be implemented in stages with reasonable exemption in specific cases.”

Some companies might even consider accelerating their plan for delisting from the markets, Ladha said.

According to Karvy’s Singh, 100 of the BSE 500 companies that capture the bulk of the market capitalisation in BSE are more than 65% owned by their controlling shareholders. Government holdings will also be affected as 40 state-run companies have public shareholdings of less than 35%.

Reuters