Channel: Corp Finance

June 11, 2010
Much brouhaha over free float
Minimum threshold for public free float has been raised from 10% to 25% for all the public companies. Is it a boon for Govt. and bane for private sector?

The Ministry of Finance, Government of India last week issued a notice to all public companies that they must have a minimum 25% public free float. Until now the larger players with an IPO of over Rs 1bn were only required to 10% public free float. Going forward all companies irrespective of their size must comply with this minimum threshold and those that are falling short must release 5 per cent shares to the public every year until they comply with the requirements.

 

This has quite a furor amongst certain segments of the market particularly those who are market makers. Certain bankers believe that although the intentions behind this move are fairly clear, which is that Government wants to raise more capital from selling of shares of public sector companies, it is the private sector that will suffer the most. They think that the current state of the markets is not amenable to taking on more issuances than those in the pipeline. There just isn’t enough depth to sustain such large volume of issuances in a short space of time.


There is already a pipeline of over USD 10bn of equity issues, and this new ruling will at least double the size of the capital requirement from public markets. The effect will be that new quality issues are likely get crowded out as investors will rush for the blue chip issuers. The potential end result could be devastating for new issuers who might have to settle for lower valuations or completely abort the IPO.

 

Supporters of corporate governance welcome the move saying that it will bring more transparency and redress the balance of power. It will also attract more Foreign Institutional Investors (FII) to the market. Others are not convinced suggesting that the net impact will create huge amounts of uncertainty and volatility in the markets. A number of companies will find it extremely difficult to comply in a short space of time. Even a 5 per cent share release in one year will be impossible and they may be forced to delist from the exchange.


The furor amongst market stakeholders has got both the regulator Securities and Exchange Board of India (SEBI) and the Ministry of Finance thinking. Clearly from their angle the sailing will not be smooth and they may well have to go back to the drawing board to figure out a more plausible and acceptable plans.

 

© Copyright ETI Dynamics Ltd. 2011.
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