Saturday, July 31, 2010

Too Much of a Good Thing

The government's recent move requiring all listed companies to maintain at least 25 per cent public shareholding has elicited both positive and negative responses from market participants. On the one hand, the decision has been praised as higher public shareholding will enhance liquidity, increase the depth of the equity market, widen stock ownership, promote greater disclosures and improve corporate governance standards. On the other hand, fears have been voiced that the oversupply of equities, which this measure will result in, could cause prices of many stocks to sink lower.
According to the norm, existing listed companies with less than 25 per cent public holding will have to reach this mark through an annual addition of not less than 5 per cent to public holding. In the case of new listings, if the post-issue capital of the company calculated at offer price is more than Rs 40 billion, the company will be allowed to go public with 10 per cent public shareholding. It will subsequently have to comply with the 25 per cent public shareholding requirement by increasing it by at least 5 per cent per annum.
The consequences
According to an Edelweiss report, assuming that dilution will happen through the sale of existing equities, public issues worth Rs 1.5 trillion will come into the market over the next five years, if the annual dilution target of 5 per cent is to be met. The minimum issuance in the first year alone will be of around Rs 615 billion.

Expediting PSU disinvestment. According to the report, 156 companies have promoter holding of more than 75 per cent. Around Rs 1 trillion will be contributed by just eight public sector companies. Thus, PSUs will dominate the issuances that occur on account of the new norms. The measure is expected to fast-track PSUs disinvestments and help the government reduce its fiscal deficit.
Increase in free-float market capitalisation. This measure will also increase the free-float market capitalisation, which is the product of current market price and the number of shares held by non-promoters. It is also expected to result in higher foreign inflows due to an increase in India's weightage in the emerging market indices.
MNCs may choose to delist. According to a research report by SMC Capital, 22 MNCs listed in India have public shareholding of less than 25 per cent. After the government's announcement, they could offload a part of their foreign parents' holdings and bring them down to 75 per cent through any of the following routes: follow-on-public-offers, qualified institutional placements, American Depository Receipts (ADR), Global Depository Receipts (GDR), a stake sale in the open market, or a combination of these.
Foreign parents of MNCs may not be willing to offload their stakes. Instead, they may prefer to delist. Lotte India, Fresenius Kabi Oncology, Astrazeneca Pharma, BOC India, and Alfa Laval are some of the prominent companies on this list. If MNCs choose to delist, they may come out with attractive buy-back offers that could bring temporary gains. But the market will be deprived of quality scrips.
Lower stock prices. Existing investors could feel the pinch as high supply could lead to lower prices.
Buy into quality stocks. In case of stocks where prices are expected to decline due to large issuances, investors could increase their exposure if the stocks are of high quality.
The big question
Since the beginning of 2010, the benchmark Sensex has registered a meagre 1.2 per cent gain. May alone saw outflows worth Rs 9,175 crore from equities. Will the market be able to absorb such large volumes of issuances when it is in such a fragile condition?

Pros and cons
• The ruling is expected to increase the depth of the Indian equity market
• By increasing weightage of Indian markets in international indexes, this could lead to more FII inflows into India
• But will market absorb Rs 1.5 trillion of paper over five years?
Posted By : S Rahul


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