India’s Union Budget Brings Bad News For Some Big Listed Companies

The Indian government wants promoters of listed companies to hold a lower stake—and the stock market isn’t excited about that.

In her union budget speech today (July 5), finance minister Nirmala Sitharaman proposed an increase in the minimum public shareholding in listed companies to 35% from 25% now.

The budget announcement saw shares of two of India’s largest IT companies, Tata Consultancy Services (TCS) and Wipro, fall over 3% each.

Among the Nifty50 companies, five companies—Wipro (73.90%), TCS (72.10%), Coal India (71%) and Hindustan Unilever (67.2%) and Bharti Airtel (67.1%)—had promoter holding in excess of 65% as of March 31, 2019.

Analysts are wary that the proposal, if implemented, will suck out liquidity from the stock market and may see MNCs with high promoter stake consider delisting.

“The requirement of off-loading of promoter shareholding can have a significant impact on the markets and the specific stocks. The regulator (Sebi) needs to provide sufficient time to meet this requirement so as to not over-flood the markets with stake sales by promoters,” said Jagannadham Thunuguntla, senior vice-president and head of research (wealth) at Mumbai-based Centrum Broking.

Industry observers are of the view that the move must be implemented carefully. “Timing, applicability, etc (need) to be closely evaluated. We don’t want this to be another “forced sale.” At the same time, this is a good opportunity for institutional capital and funds,” said Vivek Gupta, partner and national head for mergers and acquisitions at KPMG.

Criticism notwithstanding, there are few voices in the industry, who see merit in the proposal.

“This would result in companies needing to offer about Rs1 lakh crore to the public,” Rajiv Singh, CEO, brokerage firm Karvy told Reuters. “The additional supply of equity should keep a lid on valuations, but in the longer term, (it) should help in getting more retail money in equity markets.”―Quartz India