The mandatory 25% public shareholding norm in listed companies has raised speculation over delisting and stake sales. Investors need to look at the bigger picture

The Street is abuzz with speculation that foreign companies will choose to delist shares and that several Indian companies will sell stakes in the market following the mandatory 25% public float norm introduced by the government recently. This has caused a flutter among the investor community, some hopeful of making a quick buck from share buy-backs and others worried about the impact of paper supply on equity valuations. But investors would do well to be a little circumspect and take the broader picture into perspective.

This move had been in the pipeline for a long time, with the government continuously making noises about having more floating stock in listed companies. Many companies took unfair advantage of the current 10% free-float norm by enhancing promoters' net worth through a stock listing and then attempting to keep control by ensuring that the floating stock is barely in line with the listing requirements. Such companies used to mop up further capital with share buybacks that were only aimed at keeping the market price higher.

Commenting about the development, Deena Mehta, managing director, Asit C Mehta Investment Intermediates said, "This move was necessary to broad base our markets. The rule will ensure that good quality paper will come to the market and there is a possibility of large retail participation. The increase in floating stock will give higher integrity to prices. But this will happen only if public companies provide rebates to the retail investors."

Indeed, most of the recent public issues of public sector undertakings (PSUs) have failed to elicit much of a response from retail investors due to unjustified valuations. With the government looking to mop up funds to the tune of Rs40,000 crore through disinvestments, a lot many government issues will be in the pipeline in the coming year. But whether retail investors would want to have a share of this pie would depend much on rational pricing of such issues.

Apurva Shah, VP and head of research (institutional equities) at Prabhudas Lilladher said, "In the long run, a higher public float eases the potential for manipulation in any stock. It also gives more powers and greater voice to minority shareholders. It will lead to higher market liquidity in the long run."

Vetri Subramaniam, head - equity funds, Religare Asset Management Company believes that the anticipated flow of money will be subject to the company having good fundamentals and reasonable valuations. "PSU companies have a limited weight in free-float based indices despite their significantly higher market capitalisation. Currently PSU companies have a weight of 15.7% in the Nifty index, which is a free float adjusted index, whereas on a full market cap basis-their weight would be nearly 29%. This increased float will raise their weight in benchmark indices and this will in turn attract more money to such companies.
Obviously all of this is subject to the company having sound fundamentals and reasonable valuations."

Speaking about the possibility of firms delisting shares, Mr Subramaniam said, "I suspect some will delist but others may well choose not to do so due to the prohibitive cost that it would entail. Each company will have to decide what is right for it in the context of the cost involved and the benefits of being listed."

Apurva Shah feels that foreign companies won't be in a hurry to take the exit door, as is being widely speculated. "It is too early to speculate on what their move will be. Delisting in India is a very difficult procedure. It was very inconvenient for most MNCs who have tried to do so in the past. So it is not given that MNCs would want to delist. Some of them will, but I don't think there will be an en-masse delisting of shares."

Ms Mehta is also a bit circumspect about MNCs delisting shares. "We should look at the bigger picture. Some companies may think of exiting. In 1970s, several multinationals such as Coca Cola exited India since the then Janata Government asked the companies to dilute their share holding to below 40%. Today, India is a market which few can ignore."

What will be the impact of this move on the valuations of equities in the short term? Analysts and market experts are of the view that the free-float factor may act as a drag on the markets. Mr Subramaniam has a different perspective on the matter. "All else being equal, more paper supply does have a negative effect on valuations; but this is not a zero sum game and hence I would not jump to that conclusion."

Deena Mehta confirmed, "In the short run, due to increase in supply of stocks, the prices may be under pressure, but as the time goes and company performance catches up, we would see that this negative impact will not remain."

Apurva Shah believes, "Any supply of shares in the short term does put some pressure on the valuations. In case of those companies which have a substantial amount to float, investors will have to come down a bit on valuation expectations.

However, they will need to value each company on its own merit. As and when the shares come up for sale in the market, they need to be valued on a case-by-case basis."