Finance Minister Nirmala Sitharaman, in the latest Union Budget, proposed to reduce the promoter holding of listed shares from the current 75% to 65%. SEBI is likely to examine the same. However, it is only a proposal for now. Even if implemented it is likely to be over a few years’ time & unlikely to have a short term impact. The last time such a step was taken there was a 3-year window to comply with the 75% promoter holding cap (set in 2014).
The step is likely to increase the liquidity in the stock market and help in reducing manipulation. It is generally seen that other than PSU stocks where government holding has traditionally been high, for private companies a high promoter holding mostly commensurate with quality companies or MNCs. Quality companies not only have high promoter holding but also high, sticky institutional holdings leading to low liquidity. An increase in public shareholding will thus improve liquidity, price discovery & lower impact cost of holding. A higher public participation, especially institutional holdings also improves transparency and in turn corporate governance.
India has traditionally been a promoter driven market with promoters not willing to give up control. Thus India has one of the lowest free floats among developed countries. This also leads to manipulation of stock prices. I expect this move will enhance India’s weightage in global indices & attract more foreign capital. More international investors who till now would have stayed away from mid-cap stocks, will start investing in them if impact cost comes down enabling them to enter & exit smoothly. Thus market width is likely to improve to an extent. I expect a re-rating in quality mid-cap stocks with high promoter holdings (illiquid stocks).
All MNCs and IT companies generally will have to meet the above requirement. Some MNC’s may choose to delist, which will result in an open offer from them. The requirement to meet 35% would result in companies needing to offer over Rs 1 lakh cr to the public, but this is likely to be over the next 3-5 years. At a time when monthly SIP flows into equities are in excess of Rs.8000cr I believe the stake sale is likely to be absorbed easily over a period of time.
In the longer term, higher free float should help in getting more retail money in equity markets. If share float increases then automatically trading volume will increase benefitting the overall health of the market. The proposal if implemented in a calibrated manner should auger well for the stock markets. As market width improves, beyond the top 20 stocks, there should be a rerating in quality midcap stocks.
Find below a list of 20 companies which may see renewed interest from investors once liquidity goes up. It is based on quantum of sale in which promoters may have to offload stocks if the proposed regulation comes at current market prices/market cap. The below table takes into account only the promoter holdings. If we add sticky institutional holdings to it free float will decline to single digits for most Companies.
|Company Name||Market Cap (Rs. Cr)||Promoter Holding (%)||Need to offload (%)||Qty of sale (Rs.cr)|
|Avenue Supermarts Ltd.||88975.7||81.20||16.20||14414.1|
|HDFC Life Insurance Co Ltd||99089.0||76.14||11.14||11038.5|
|HDFC AMC Ltd.||41129.2||82.71||17.71||7284.0|
|Hindustan Aeronautics Ltd.||22566.1||89.97||24.97||5634.8|
|ICICI Pru Life Insurance Co Ltd.||55186.5||74.98||9.98||5507.6|
|Interglobe Aviation Ltd.||53126.9||74.93||9.93||5275.5|
|ABB India Ltd.||31738.6||75.00||10.00||3173.9|
|Berger Paints India Ltd.||29468.9||74.98||9.98||2941.0|
|Pidilite Industries Ltd.||61023.6||69.75||4.75||2898.6|
|Gillette India Ltd.||23107.5||75.00||10.00||2310.7|
|Abbott India Ltd.||18849.2||74.99||9.99||1883.0|
|Schaeffler India Ltd.||13949.8||74.13||9.13||1273.6|
|Bharat Dynamics Ltd.||5423.3||87.75||22.75||1233.8|
|Wabco India Ltd.||11617.6||75.00||10.00||1161.8|
|Solar Industries (India) Ltd.||10533.0||73.15||8.15||858.4|
|Monsanto India Ltd.||3760.2||81.84||16.84||633.2|
Source: Ace Equity, price as on 15th July 2019.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’