Update: PSCs get another year to comply with MPS requirements

Ankit Vashishth, Executive

Vinod Kothari and Company; corplaw@vinodkothari.com

To prevent concentration of shares in the hands of a few market players and to ensure a sound and healthy public float to stave off any manipulation or perpetration of other unethical activities in the securities market, it is imperative that the shareholding of listed companies is not blocked by promoters and certain percentage of free float is available for trading by the public.  Regulation 19A of the Securities Contracts (Regulation) Rules, 1957 mandates all listed companies to maintain a Minimum Public Shareholding (‘MPS’) of 25%. Further, to comply with the said requirement, SEBI vide its circulars dated November 30, 2015[1] and February 22, 2018[2] prescribed the manner for achieving MPS.

The timeline for achieving MPS varies for listed public sector companies and listed companies. With regard to the listed public sector companies, the deadline to meet the MPS was 2 years from the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018[3]  which expired on 2nd August, 2020.

Considering the unfavorable market conditions and difficulty in meeting the MPS requirement during the outbreak of the pandemic, the Ministry of Finance has vide its notification dated July 31, 2020[4] has extended the time period by 1 year i.e. till August 2, 2021 for listed public sector companies.

Initiation of MPS for PSCs

MPS requirements for listed public sector companies initiated in the year 2010[5], when these companies were given a timeline of 3 years to comply with 10% MPS requirements.

Later, as per prevalent market conditions the Central Govt. in August, 2014[6] increased this threshold to 25% and these companies were given a timeline of 3 years to comply with MPS requirement which was subsequently increased to 4 years in July, 2017[7]. Considering the difficulty faced by such companies in diluting their shareholding, the Central Govt. in August 2018[8], allowed a fresh timeline of 2 years i.e. upto August 2, 2020 to such companies to comply with such requirements.

Current Scenario

PSUs constitute around 7.22% of the capital market in India and according to the shareholding data provided by bsepsu.com[9] there are a total of 64 listed CPSEs in India out of which 26 of them have less than 25% public shareholding. This list is dominated by companies which include Hindustan Aeronautics Ltd, General Insurance Corporation of India, Indian Railway Catering & Tourism Corporation Ltd, New India Assurance Company Ltd and counting. There are even such companies in which more than 90% of the shareholding is alone held by the government.

Central Government in Dec, 2019[10] gave ‘in-principle’ approval for strategic disinvestment of 33 CPSEs including subsidiaries, units and Joint Ventures with sale of majority stake of Government of India and transfer of management control. Also, companies like Rites Limited[11] and Coal India Limited[12] in recent times have tried to meet MPS requirements via Offer for Sale.

Due to Covid-19 pandemic, the stock market has already crashed and is now showing small signs of revival. Where listed companies are unable to comply with normal regulatory requirements in this current environment which are constant and urgent in nature, the extension in its 4th attempt to the PSCs will save them from the badge of non-compliance.

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[1] https://www.sebi.gov.in/legal/circulars/nov-2015/manner-of-achieving-minimum-public-shareholding_31141.html

[2] https://www.sebi.gov.in/legal/circulars/feb-2018/manner-of-achieving-minimum-public-shareholding_37953.html

[3] http://www.egazette.nic.in/WriteReadData/2018/188171.pdf

[4] http://egazette.nic.in/WriteReadData/2020/220809.pdf

[5] http://egazette.nic.in/WriteReadData/2010/E_440_2011_011.pdf

[6] https://www.sebi.gov.in/legal/rules/aug-2014/notification-securities-contracts-regulation-second-amendment-rules-2014_28373.html

[7]  https://www.sebi.gov.in/legal/rules/jul-2017/securities-contracts-regulation-third-amendment-rules-2017-w-e-f-july-3-2017-_35291.html

[8] http://www.egazette.nic.in/WriteReadData/2018/188171.pdf

[9] http://www.bsepsu.com/gov-policy-hp.asp

[10] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1594731

[11] https://rites.com/upload/misc/Balancesheet/INTIMATION-FOR-RITES-EMPLOYEE-OFS.pdf

[12] https://www.coalindia.in/DesktopModules/DocumentList/documents/10112018182944.pdf

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