Given the larger investor interest in the Indian stock market and the large funds flowing in from overseas through the foreign financial institutions, the Indian stock market needed more scrip to keep trading volumes. There are very few floating stocks available, compared to the huge volume of funds inflow. As a result, investors tended to concentrate on a select band of shares. We need more floating stocks to absorb the funds and a rising volume of instruments for investment. This new requirement will meet these demands to a large extent.

Secondly, large public holding is good for any individual stock as well as the market. It creates a much larger base and in the end floating stocks should encourage trading and liquidity for the public shareholder. When the economy is booming, the corporate sector is turning out good results, large public holding will give opportunity to the investing public to get a share of the good performance. If a company is raising some capital from the market and no longer 100% held by the promoters, and if the promoters want to be listed on the exchanges, then they should give a little more to the public as well. There should be no two opinions on that.

However, the timing is possibly not propitious. The stock market has been swinging wildly for the greater part of the current year. It is not only the Indian market which is proving to be volatile, the global markets are if anything even more unpredictable. The crisis in Greece, followed by rumours of similar problems in other European countries, the uncertainty over the euro, all are creating a situation in which the financial markets have become completely disturbed. The Indian market is now integrated with the global markets, mainly through the FII route. Their investments will call the tune of the market and once the FII flows go down the market tanks.

There is reason to believe that the flow of funds from overseas may reverse in the short term if the crisis in Europe continues. Already we have seen some $2 billion withdrawn from the Indian markets earlier in the year. On Monday (June 7) the foreign institutional investors were net sellers to the tune of Rs400 crore and the market went down by 337 points. This is happening almost routinely. As a result, the stock market has witnessed serious loss of valuation. Further the rupee has also lost against the US dollar. It has currently slipped further against the US dollar this week. Admittedly, the rupee sometimes had somewhat gained against the euro. It is not clear, how these things will play out in the foreseeable future.

Against this larger background, it will be quite difficult to implement the minimum public holding requirement within the stipulated time frame.

First of all, there will be a rush of offerings from companies, including some very large public sector units. Their valuations are also in many cases high and therefore even the minimum 5% annual offer could attract substantial funds. In an uncertain market with gyrating valuations it will be quite a job for the issuers to time their entry. The trick will be to catch the market on its upswing and this will somewhat be a streak of luck as well. There is no doubt that if the timing is not correct some issues can even get bombed for no fault of theirs. The issuing companies will therefore run quite a risk in planning their public offers in the coming one year.

Secondly, too many issues coming in can lead to bunching and therefore will have an impact on valuation as well. It will be important for the merchant bankers and issue managers to closely monitor the issues and therefore plan out the entry schedules. In case of a coincidence of some large companies offering too close to each other, this will surely create problems. Maybe, the financial circles will have enough internal communication to pragmatically manage the situation. The market will surely be the best judge and should work out these competing claims.

Thirdly, and most critically, we are going through a phase of expansion and fast growth. The funds requirements are increasing fast. The telecom sector has paid out huge fees (in excess of Rs 1,00,000 crore) for getting their various licences. Admittedly, these have been funded mainly through borrowing from banks. There is no doubt that some of them would now like to raise funds directly from the market. We cannot take for granted that investments will flow in from overseas just as it did last year. Estimates have been put out already that even gradual disinvestment and public offers should absorb something like Rs200,000 crore. This is no small change. Where will the funds come from?

Yet another dimension of this move is the requirement that some 29 large listed public sector units will have to disinvest to get to the public holding threshold to retain their listing. Some market operators point out that there might have to be two disinvestment offers every month for some period of time. This will once again be a big call on the market. The worry is that given the spate of public offers which might come in, will this affect pricing. Some of the public sector units have valuable assets built and nurtured over years. They should not sell cheap. (IPA Service)