Strong nations are built on adherence to the rule of law. The Indian Constitution ensures the law is equal for all. For a market participant, this is especially reassuring because, in the jungle of capitalism where competitive spirit and love for the bottom line decide human actions, laws make the system equitable and transparent.

However, all of this may seem futile in the light of the disregard of SEBI (Securities and Exchange Board of India) regulations by companies, in which a majority of shares are held by the government.

Market regulators and governments across the capitalist world layout rules for the deepening of capital markets. In order to discourage promoters from stock manipulation by ensuring adequate liquidity, SEBI has made it mandatory for promoters of listed companies to keep their shareholding at 75% or less. It has mandated at least 25% public shareholding within the five years of listing. This rule has been in force since 2014 and can be waived off in public interest, only at the behest of the government.

In spite of this, India has 33 government-owned companies — owned by the Centre (including public sector banks) and states — that continue to violate this rule. In all, 15 such companies belong to the central government (see The Violators). Government companies get exemptions in the name of public interest but it should be explored whose interest is being served by such violations, says Amit Tandon of Institutional Investor Advisory Services.

Evolution of The Rule

Until 2000, there was no requirement for maintaining minimum free float on a continuous basis. In 2001, SEBI introduced a new guideline that asked all the new listed companies to maintain free float at a level required at the time of their IPO, stated a research report by OECD released in 2020.

In 2004, the continuous requirement was amended. All the new listed companies were required to maintain at least 25% free float. There were, however, some exceptions. One was that the companies that were allowed to offer 10% to the public at the time of IPO would have to sell 10%, not 25%, shares to the public. Infrastructure companies were exempted from the 25% free-float requirement.

In 2006, the continuous requirement was amended again. The 25% threshold was applied to all listed companies except (a) listed companies that offer a large number of shares (two crore or more) or a large amount of capital (₹1,000 crore or more in market capitalisation); (b) listed companies that offer less than 25% but more than 10% of total shares in the IPO, and; (c) government companies.

In 2010, the requirement for the minimum free float was made uniform at 25% for all companies, both listed, or those seeking to list. In cases where the post-issue capital of companies was more than ₹4,000 crore, for initial listing, the company was permitted to offer 10% to the public. All companies were required to increase their free float by at least 5% per annum until the 25% requirement was met.

PSUs were asked to achieve the minimum public shareholding of 10% within three years while companies in the private sector were told to have at least 25% public shareholding within three years.

In 2014, the exemption given to government companies was removed, and all listed companies are now required to maintain at least 25% public shareholding. After the pandemic in 2020, the time period for achieving 25% free float was increased from three years to five years from listing day.

An obvious question is why government companies are violating minimum public shareholding norms. And, isn’t it unfair for the regulator to ensure that only private players stick to the rules, while it doesn’t pursue violators where the government is the majority stakeholder?

Also, why a government body like DIPAM (department of investment and public asset management) that is mandated for the divestment of such companies remains inactive in tapping these 16 companies for divestment in a vibrant and buoyant market? Is any public interest being served by not adhering to the mandatory disinvestment?

For instance, companies like ITI, ITDC, and HMT were listed many decades back but the central government still owns over 87% of ITDC and over 90% stake in ITI and HMT. As per the August 19 closing price, the ITI market cap is over ₹11,000 crore, ITDC market cap stood at approx. ₹3,500 crore, while the HMT market cap was boosted around ₹3,000 crore.

Speaking with Fortune India, a market veteran said the last year’s euphoria in the stock market gave ample opportunity for the divestment of such long-ignored government companies. “But, sadly, working hard for lesser-known companies does not bring many accolades to career enthusiastic bureaucrats,” he adds. He also questioned SEBI's silence on the violation of minimum shareholding rules and pointed out that it is the failure of the regulator that these companies were not taken to task.

In 2021, Indian companies raised ₹1.31 lakh crore through IPOs. It is incomprehensible why the government and, especially, DIPAM did not leverage that market euphoria.

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