Monday, June 7, 2010

Free Float.. The fumble of the Regulator..

Indian capital markets have always been a joke. Anyone can list. All you need is a business plan or a friendly merchant banker. And you start with a ten percent dilution at stage one and after a few years, the promoter holding can be zero. No one will know. Our stock exchanges have absolutely no gate-keeping, with regulators generally not having a clue about anything. It is a travesty that companies like NMDC/MMTC are given the status of ‘listed’ companies, with a handful of shareholders. Our stock exchanges are a great place for raising venture capital and have been the principal reason that venture capitalists find it tough to get decent deals in India. Anyone can list at any price on the stock exchanges. And the processes are designed to hide things from the investors and also make sure that the investor never gets time to read anything about an IPO. Hence, one fails to understand why the FM wants to tinker with the stock markets? Surely, the stock markets are supposed to serve the interests of the issuers and the bankers. The investors do not mind manipulated prices nor do they care a fig about it.
Our octogenarian Finance Minister mentions that the move to increase public shareholding to 25% will deter price manipulation. There, he is mistaken. Any share price can be manipulated, if one has enough money. There are many listed companies which on paper have more than 25% holding with ‘non-promoters’ and included in ‘public’ category, but in reality happen to have benami holdings which are included in the public category. So, this move, in no way will put an end to manipulation of share prices.
The latest dictat of having a 25% holding is one more joke. It is a rule that cannot be complied with and if a company or promoter does not want to comply with it, SEBI cannot do a damn about it. Yes, they can threaten to not give permits to new entrants, but soon they will relax these, with several catches. The first demand will come from the PSU undertakings. When the regulator does not understand what the markets are all about, he is but a tool in the hands of industry and investment bankers. After having debased the concept of ‘listing’ it does not make any sense to put in new entry barriers. After you have given permission to companies to list with minimal free float, SEBI cannot deny the continuance of listing by executive action.
I would rather urge a carrot and stick policy to encourage broader public participation in businesses. For instance, one or more of the following steps could have been looked at:
i) Shifting of companies with less than 25% public holding to the OTC exchange. This will preserve some sanctity for a stock exchange ( this will also give some life to the OTC exchange);
ii) To start with, ensure that stocks where the public holding is below 25%, cannot be traded in F&O;
iii) Deny inclusion of such illiquid stocks in to any sort of Index;
iv) Increase the fees payable to the exchanges/regulator by such companies;
v) Restrict trade in these stocks on cash basis only.
vi) Permit open market sale of promoter holdings through block deals, with institutional buyers (in fact this is the typical route that has been used by many promoters to dump their shares);
vii) Instead of 25% non public, a better thing would be to insist on a minimum of 100,000 shareholders with a minimum holding of 1000 shares each, for permission to be listed on the main board of an exchange. Otherwise, the OTC is always there for the illiquid companies. In fact, I recall that the NYSE used to have this criterion.;
viii) Have a higher rate of taxation for companies that do not have 25% non-promoter holding. However controversial it sounds, it is the only way to ensure compliance. Once this is done, suddenly promoters will cease to worry about market timings for dilution of equity;

The idea is that these companies are encouraged to dilute. SEBI is foolish in prescribing a 5% per year dose of dilution. That simply will not work. A promoter will sell only when he gets a price that he is happy with. Market conditions do not remain stable for any length of period. Hence, you cannot force disgorgement.
An interesting fall out will be what happens where the promoter has gone in for increasing his shareholding and reduced free float. Similarly companies have gone in for buy back and reduced the free float. Many MNC’s have gone in for buyback with a view to delist. How can a regulator force them to disgorge once again?
The other fall out will be the argument of experts that the markets cannot absorb so much. It will nail the argument that India has a vibrant investor community, when the truth is that it is a shrinking universe. Listing has become a joke with the permission of this anachronism called ‘QIP’ issuances, warrants to promoters, preferential issues etc.,
It is interesting that the regulators find a way of cutting their own noses to spite their faces, time and again!

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