Tata
Consultancy Services Ltd and Hindustan Unilever Ltd are among at least
100 Indian companies that may need to sell shares worth billions of
dollars after the government proposed to raise the minimum public
shareholding.
Companies must increase shares held by the public to a
minimum 35% from 25% at present, Finance Minister Nirmala Sitharaman
said in her maiden budget, asking the market regulator to “mull” the
proposal.
The rule may result in equity sales of about Rs3.9tn
($57bn), creating a supply overhang on the market that’s trading near a
life-time high, according to analysts including Centrum Broking Pvt.
The
proposal may have another side-effect: it could prompt domestic units
of multinationals, who don’t rely on local funding, to delist from
exchanges.
“The detail to watch out for is the time allowed to meet
this new rule,” said Rajiv Singh, who heads broking at Karvy Stock
Broking Ltd. “This will mostly impact multinationals and state
companies, but in the long term, it will help get more retail money in
equities.” There are at least 40 state companies with public holding
lower than 35%, he said.
This isn’t the first time the government has forced founders to reduce their holdings to boost liquidity.
In
June 2010, the regulator gave companies three years to a ensure a
minimum public float of at least 25%. That spurred share sales of at
least $1bn in June 2013 alone from companies including property
developer DLF Ltd and JSW Energy Ltd.
Exchanges globally have also introduced free-float rules to ensure liquidity for investors in a publicly traded stock.
And
index compilers such as MSCI Inc take into account the percentage of
shares available to investors when determining a stock’s representation
in stock gauges. Here’s a table showing some of the large companies that
may have to sell shares when the proposal gets implemented.
“Timing
and applicability need to be closely evaluated — we don’t want this to
be another forced sale,” said Vivek Gupta, partner and national head at
KPMG in India.
Shares in Wipro Ltd slumped 4.2%, the most since March 8.
Coal India Ltd slipped 3.7% and TCS ended 3.6% lower on Friday.
Here is what the analysts are saying about Sitharaman’s proposal.
Jagannadham
Thunuguntla at Centrum Broking Pvt said 25% of the total companies
listed on Indian exchanges will have to offload stake to meet the new
requirement. The overhang of the proposal can have significant impact
and thus regulator needs to provide sufficient time to meet the
requirement.
Vinay Pandit of Nivesh Securities Ltd said the proposal
if implemented can cause several changes in Nifty Index over the course
of two years A lot of insurance and consumer companies will get
investors attention due to the proposal.
Deven Choksey at KR Choksey
Shares & Securities Pvt said 167 companies in BSE 500 Index might
have to sell shares and thus their stock valuations may come under check
if the rule takes effect. Proposal would also boost taxes for the
government as 40 of the 167 companies will end up paying about Rs90bn in
long-term capital gains tax at current prices.
Anil Talreja at
Deloitte India said the proposal will be “fortifying the fundamentals of
governance”. “There would be some clarifications expected including on
grandfathering of existing situations.”
Traders at the Bombay Stock Exchange.