There is always a good reason to do the wrong thing. On 12 September 2025, the Securities and Exchange Board of India (SEBI), at its board meeting, approved significant changes to the minimum public shareholding (MPS) norms for large companies. The current requirement is that companies dilute at least 10% of equity within three years of listing.
Under the new proposal, companies valued between Rs50,000 crore and Rs1 lakh crore will be allowed to list with just 8% public float (minimum float of Rs1,000 crore) and meet the 25% MPS norm in five years. For mega firms valued between Rs1 lakh crore and Rs5 lakh crore, the float requirement has been cut to 2.75% or Rs6,250 crore, with as much as 10 years to reach the 25% benchmark. (Read: Big Boost for NSE, Jio IPO Plans as SEBI Recommends Relaxed Listing Rules)
This ‘reform’ is being sold as a way to facilitate marquee listings -- perhaps for companies such as the National Stock Exchange (NSE), Reliance Retail and Reliance Jio – and, thus, channel more retail money into the stock market. Indeed, mutual funds (MFs), which are awash with a systematic inflow of household savings, are desperately seeking quality paper to absorb them. This liquidity glut has been driving valuations of blue-chip and middling companies to dizzying highs.
But history suggests that easing float norms is a double-edged sword. In the late-1990s, when low initial floats allowed companies to raise enormous sums with minimal dilution of founders’ holding, the market quickly turned into a playground for manipulators. For well-performing firms, the capital market became a bottomless well of cheap money – especially for their founders. For the rest, more dubious entities riding a wave (dotcom), it creates fertile ground for a speculation, rigging and inflated valuations.
Ironically, SEBI’s liberalisation coincided with the closure of a high-profile investigation into the Adani group which ended with a clean chit for its promoters. Most Adani companies have low public float—a factor that made them vulnerable to sharp volatility and allegations of stock price manipulation. SEBI’s new rules appear to double down on that model, despite its risks.
SEBI’s public explanation is that massive initial public offers (IPOs) with large floats could overwhelm market appetite, deterring large companies from listing in India. But the regulator avoids discussing the consequences of its tinkering with MPS norms in response to corporate pressure and situations, or its failure to prevent the negative consequences. Maybe, it is time to revisit the history of MPS.
Past Imperfect
Let us rewind to the 1980s, when SEBI was still a non-statutory body and the Bombay Stock Exchange (BSE) Sensex was in triple digits. I remember the late MR Mayya, then executive director of the BSE, tirelessly advocating the legally mandated 40% public shareholding mandated under the Securities Contract Regulation Act (SCRA) in his speeches, with little impact. That itself is a significant reduction from the earlier 60% MPS requirement in the days when companies were small and their prices prone to manipulation due to rampant insider trading.
The late-1990s saw a pivotal change. Media and information technology (IT) firms successfully lobbied to list with just 10% MPS. This ensured lower dilution of promoter stakes and is primarily responsible for all the millionaire and billionaire employees that emerged from employee stock option plans (ESOPs). This also opened the doors to a host of dubious companies in the tech sector.
Thinly-traded IT and media stocks became ideal vehicles of stock market operator Ketan Parekh, whose infamous ‘K-10’ stocks soared to stratospheric highs through low liquidity, circular trading, promoter collusion and artificial demand. Companies like Satyam Computers, which flamed out after founder, B Ramalinga Raju confessed to massive accounting fraud, symbolised that era’s excesses. The dotcom bubble ended in the inevitable bust leading to a second joint parliamentary committee (JPC) investigation into a stock market crash, in less than 10 years!
And yet, no lessons were learnt. An amendment in 2010 reduced the minimum public shareholding to 25%. MPS norms are intended to ensure adequate liquidity, foster broad market participation, and curb price manipulation. But the government seems to think that it can keep tinkering with the rules. In 2019, there was a proposal to raise MPS to 35% but was dropped under pressure from companies.
SEBI’s Dilemma and Responsibility
SEBI has argued that modern companies, after multiple rounds of venture capital (VC) funding, carry valuations so inflated that forcing them to dilute 10% upfront is unrealistic. It would force them into a very large float at lower prices which would not only be difficult for the market to absorb and could deter marquee listings. SEBI has argued that this could deter companies from listing in India.
But the counter-argument is just as powerful. Most IPOs today are primarily exit routes for early investors. Retail buyers, either directly or through MFs, end up funding those exits at euphoric valuations. Ola, Nykaa, One97 (PayTM), Swiggy, Honasa Consumer and Mobikwik, etc, are examples where the real valuations of VC-funded companies were vastly different from the hype that was created. They languish below their listed prices. Zomato and Car Trade are exceptions.
Investors may have forgotten these experiences in the rash of IPOs hitting the market every week; but, for the regulator, it is a dangerous trade-off. The cycle is familiar: frenzied hype, high offer prices, sharp listing-day gains for some and long-term disappointment for many. With a tiny float, volatility rises, manipulation becomes easier and genuine price discovery is undermined.
The F&O Loophole
The problem doesn’t stop there. Many of these low-float stocks are quickly admitted into the futures & options (F&O) segment and also into indices, increasing the scope for speculation and drumming up huge volumes and revenues for exchanges and the government (in the form of securities transaction tax). As Moneylife has repeatedly argued, F&O eligibility should be restricted to companies with sufficiently large float and shareholder base. Instead, thinly-traded stocks are ideal to be weaponised for expiry-day games.
SEBI itself recently alleged that Jane Street, a large US investor, manipulated F&O expiries to extract massive profits at the cost of retail traders. That case remains under appeal and SEBI’s investigation is incomplete. The regulator has not yet tightened rules to reduce expiry-day volatility.
The jury is still out on whether Jane Street was able to manipulate the Indian market because of low liquidity and shallow depth and if SEBI’s surveillance tools and regulatory framework lags behind the complexity of today’s high-frequency trading (HFT) and artificial intelligence (AI)-driven algorithms. (Read: Tough Regulator, Weak Market: Jane Street Saga Exposes a Deeper Problem)
Cyclical Amnesia
Without these checks & balances in place, the narrative of Indian capital market regulation reveals a pattern of cyclical amnesia. Every time the market is manipulated and retail investors get burnt, SEBI and the finance ministry come up with stricter rules, only to undo them when times are good or the right lobby exerts pressure. Minimum public float rules should be designed to protect investors and maintain liquidity. SEBI’s decision to dilute MPS without protective measures is a regressive step that disproportionately favours issuers.
Robust public shareholding is a critical pillar for maintaining market integrity. Weakening these norms reduces the scope for public and institutional oversight, heightens risks of manipulation and illiquidity and may, ultimately, harm retail investors, fair price discovery and the reputation of the capital market. Worse, it signals that the regulator is more responsive to corporate lobbying than to the lessons of financial history.
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