India faces challenges in reimposing a rule requiring listed companies to have at least a 25% minimum public float. Approximately $33 billion worth of shares would need to be sold by 174 companies to meet this requirement, with state-run companies accounting for 83% of those shares. While increasing the public float is desirable for creating deeper markets, concerns include overwhelming the market with a large supply of shares and resistance from controlling shareholders in private companies who do not want to reduce their stakes. A phased approach may be needed if companies are forced to sell shares to meet the 25% minimum public float.

1. DEALTALK-Tough task for India to set 25 pct public equity float
Thu Aug 27, 2009 12:17pm IST
* Struggle seen for 25 pct minimum public float proposal
* About $33 billion in shares would come to market - study
* Phased approach needed if companies forced to sell shares
By Narayanan Somasundaram
MUMBAI, Aug 27 (Reuters) - India faces an uphill task to reimpose a rule requiring listed
companies to have at least a 25 percent public float, with resistance seen from controlling
shareholders in private sector firms.
The finance ministry's effort to bring in a uniform public float minimum comes after a similar
push by the capital markets regulator was waylaid by the collapse in markets last year.
Market players say reimposing a minimum float is a good idea but would work only if it were
rolled out gradually in order to prevent flooding the market with shares.
"Theoretically, it is great with wider ownership," said Sashi Krishnan, who oversees $4.5
billion in funds as chief investment officer at Bajaj Allianz Life Insurance. "But a whole set of
challenges surface when it is put to practice, be it divesting the bunch of public sector firms
or when it is forced on a large cap firm with enough liquid stock."
A total of 174 firms would need to offload stakes worth roughly 1.61 trillion rupees ($33
billion) if the minimum float rule was imposed, a study by deal tracking firm SMC Capitals
showed. Of that, 28 state-run firms, primarily in energy, steel and banks, account for 83
percent.
By comparison, Indian firms have raised $10 billion in share sales so far this year,
surpassing the $7.2 billion raised in all of 2008, according to Thomson Reuters data.
Big state companies with public floats of less than 25 percent include NTPC Ltd (NTPC.BO:
Quote, Profile, Research), which generates a quarter of the nation's electricity, National
Aluminium Co (NALU.BO: Quote, Profile, Research) and Steel Authority of India (SAIL.BO:
Quote, Profile, Research).
Private sector firms with public floats that would not meet a 25 percent minimum include
heavyweights DLF (DLF.BO: Quote, Profile, Research), Wipro (WIPR.BO: Quote, Profile,
Research) and Reliance Power (RPOL.BO: Quote, Profile, Research).
PROPOSAL TO HELP PLUG SHORTFALL
India, facing its highest fiscal deficit in 16 years, can use the sale of stakes in government
companies to meet the shortfall. A minimum float rule would mean the sale of larger stakes
in state firms than might otherwise be considered.

2. The mandatory share of huge blocks of stock could also be a boon to investment banks
managing the sales.
"It is short-term negative for the secondary market, but long-term positive given the free
float," said Navneet Munot, chief investment officer at SBI Mutual Funds.
Finance Minister Pranab Mukherjee noted in his July 6 budget speech that the average
public float in Indian firms was less than 15 percent.
"Deep, non-manipulable markets require larger and diversified public shareholdings. This
requirement should be uniformly applied to the private sector as well as public sector
companies," he said.
Recent media reports have said the finance minister has approved a minimum public float
plan in phases from 2010/11. [ID:nBOM537636]
"There will be pulls and pressures especially from some private sector firms but this time
the authorities are banking on pulling it off given the government finances," said Arun
Kejriwal, director at research firm KRIS.
However, several market insiders were sceptical of the plan's success, given the huge
amount of stock the market would need to absorb, as well as the reluctance of controlling
shareholders to trim their stakes.
"It is just impractical from an execution point of view. India just does not have the
capacity," said a top executive at a foreign investment bank. He did not want to be named
given the sensitivity of the matter.
The Securities and Exchange Board of India tried implementing the 25 percent rule in
phases from 2006 on firms with a market value of under 10 billion rupees ($204 million).
The 25 percent minimum float was first relaxed in 2000/01 for technology companies amid
the tech boom, when lofty valuations meant Indian markets could not absorb huge share
offerings. ($1 = 49 Indian Rupees) (Editing by Tony Munroe and Himani Sarkar)