The government has directed Securities and Exchange Board of India (SEBI) to increase the public shareholding on listed companies to 35% which earlier used to be 25%. The move would affect a lot of multi-national corporations (MNCs) who have higher promoter shareholding. To reduce their stakes, these companies would have to utilise the options of a follow-on public offer (FPO) which is essentially a stock issue of additional shares made by a company which is already publicly listed. Alternately, they may also utilise qualified institutional placement (QIP) which is a mechanism utilised in India to raise domestic capital through markets without relying on foreign resources. The process of issuance through QIP is quicker and cost efficient and also the legal fees is also lesser compared to an FPO. Minimum 25% public holding rule was introduced in 2010 and made mandatory in 2014. Therefore, SEBI might give ample time to shareholders to adhere to the new regulation.
The capital market in India is still in a developing phase. While it may be acceptable for the large caps to have small promoter shareholding, it is not the case with small and mid cap firms. Investors essentially look at the promoter shareholding to establish trust with the Company. Further, the small and mid caps may even delist because diluting too much control for some companies may not be in its best interest.
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