Positive changes in pre-IPO equity placement rules in India
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Liquidity, depth and transparency are some of the main aspects that need to be enhanced in the Indian equity markets. The majority of the trading happens in the shares of the top companies and the attempts to encourage the stocks of small and medium enterprises to become an active part of the secondary trading have generally not been successful. Similarly, transparency has been another aspect that needs to be addressed. In a move that is expected to improve both liquidity and transparency, the Indian Finance Ministry has decided that any equity placement prior to an Initial Public Offer (IPO) will be categorized as part of promoter shareholding for the purpose of calculating minimum public float. This change will be part of a proposed amendment to the Securities Contracts (Regulation) Rules, 1957, that would prescribe a minimum public float of 25 per cent for initial and continuous listing, in all companies regardless of their size or ownership status. Also, the rules would be equally applicable across all sectors, thereby removing existing waivers for the public sector undertakings (PSUs) and companies in the sectors of information technology (IT), media, entertainment and telecommunication. Encouraging greater public ownership in all companies through such a change is a very positive move indeed. It will lead to greater accountability and transparency in the long run. The depth of trading in the shares of the companies that are affected by the new rules is expected to improve and the overall health of the capital markets will also benefit. There are some implications of the rules in terms of greater accountability for the investors whose equity is considered to be a part of promoters’ holding. While this means that these investors, mainly institutional, would have to take more precautions and be aware of the legal ramifications, on the whole it is desirable as also sheds some light on the role of institutional investors and high net worth individuals in the decision-making processes of companies. Hence, while this new change is expected to ruffle some feathers initially, it is a welcome step in improving the quality of trading and enhancing transparency in the Indian markets.