Mandatory 25% Public Holding Norm – What Does Investors Need to Know?

Until now, traders and investors in blue-chip stocks based their buying/selling decisions for a particular stock based on fundamentals and/or technical view on the counter.

However, from now on, the frenzy of speculation in these counters could as well be co-related with one more crucial aspect – the public float of the company.

The government has made it mandatory for all listed companies to have a minimum public float of 25%. Already listed companies, where the public shareholding is below the stipulated mark, will get an option to creep to the limits by way of annual addition of at least 5% in public domain.

The new law would have broader ramifications on the structure of the equity holdings of various listed companies, whether government or privately-owned. The promoters of the companies will have to shed more shares in favour of the public holding, where public float is lower than 25%.

HOLD TOP LISTED COMPANIES IN WHICH THE PUBLIC HOLDING IS LESS THAN 25%
	Disinvestment
	in % *	Rs Crore #
MMTC	24.33	41470.30
NMDC	23.38	44998.63
Power Fin.Corpn.	14.78	4102.75
NTPC	14.50	24222.69
MRPL	13.57	1839.91
National Aluminum	12.15	2865.97
Power Grid Corpn	11.36	5115.93
SAIL	10.82	9188.45
Reliance Power	9.78	3320.38
Tech Mahindra	7.97	916.07
Mundra Port	6.04	1550.68
Oracle Fin.Serv.	5.52	1036.39
Wipro	4.61	4435.97
IOCL	3.92	2983.76
DLF	3.64	1896.81
Tata Tele. Mah.	2.73	125.34
Tata Comm	1.15	99.59
Bharat Electron	0.86	135.77
Total		150305.39
* The extent to which total promoter holdings needs to be reduced to ensure a minimum 25% of public holding # Total amount for disinvestment as per current market cap

Ramification on IPOs

Companies looking to tap the IPO market to raise funds from the investors will also have to abide by this new law. That’s not all, even equity placements to institutional investors will be excluded from being a part of the public float.

This would mean that companies coming out with fresh public issues will have to announce higher stakes for the portion reserved for the retail investors or ensure dilution of promoter equity by 5% annually over the next few years until 25% public float level is reached.

Queue for De-listing Likely

It is believed that most of MNC listed companies in India are the most reluctant of the lot to dilute their shareholding in the public domain than what is already there.

Apart from that, there are some private companies where the promoters hold a majority portion of the stake whereas the general public own less than 5% stake. Such companies where promoters are reluctant to further dilute their stake to meet the new norms, could lead them to buy-out the remaining public stake in the market and get de-listed from the bourses.

For example, Micro Inks came out with delisting offer few months back. General public hold only 4.61% stake as on March 2010. In short, many such delisting offers could crop-up, within next few years, where promoters are not be willing to dilute their stake further.

An Automatic Disinvestment Mandate for the Centre

With the announcement of this new law, arrives a mandate for the state-owned listed firms with lower public shareholding, to meet the higher divestment targets in confirmation with the new 25% public float rule.

Take, for example, state-owned MMTC and NMDC. General public stake in both the companies is limited to the extent of 0.03% and 0.72%, leaving a room for large amount of disinvestments to be carried out in such PSU firms.

Other large PSU companies such as Power Grid Corporation, PFC, NTPC and SAIL need to divest anywhere between 10-15% depending upon their current status of public float.

What’s in for Investors?

Specifically, for investors it would mean over-all higher stake in both government and private companies. This would translate into lower promoter stake and higher visibility for the company by enhanced public stake and participation.

For government-owned companies, it would mean deeper scrutiny into the operations and policies of the company and, most of all, speedy implementation of the projects triggered by higher transparency. The over-all Indian equity markets would be a better place to invest with higher public say in the management of the listed companies.

The new rules also strengthens the market in the way that higher public float would mean lesser room for manipulation by a few big traders and other financial institutions who have capability to jack-up stock prices on the back of lower volumes on the bourses.

All-in-all, the new rule could well prove out to be an investor-friendly measure and improving the valuations of the company by a strong support from retail investors.

Centre to list 35 PSUs, targets Rs 1.5 lakh cr

The government is hoping to reap a bonanza from the disinvestment of public sector units (PSUs). The minister of state for heavy industry and public sector enterprises, Mr Arun Yadav, said on Wednesday that the government would list 35 public sector companies on the stock markets over the next five years.

This could help the government to get Rs 1.5 lakh crore. He said that the ministry is waiting for the finance ministry’s approval. “Once we get the nod from the finance ministry, we will start the process,” Mr Yadav said at the First Public Sector Enterprise Summit organised by CII.

Last year, the Cabinet had decided that government would divest its stake in all listed PSUs were its stake is more than 90 per cent.

In case of unlisted PSEs, which have made profits in the past three years, the Cabinet had decided to list them on the stock exchanges. According to an initial estimate, there could be some 60 PSEs that have to divest following this cabinet decision. There were 10 PSUs where government holding is more than 90 per cent and 50 unlisted PSUs with positive networth.

Last fiscal, the government raised Rs 25,000 crore from stake sale in Oil India, NMDC, REC and NTPC. This year the government has set a target to raise Rs 40,000 crore through the divestment process. The offers from the government to hit the markets this year are Coal India, SAIL, EIL and MMTC. “Some PSEs have outperformed the market and investors are indeed looking forward to listings by PSEs,” said Ms Usha Narayanan, executive director of Sebi.

These 10 stocks got devastated in the market crash

After they rallied with the herd during the recent run-up in the stock markets, reality has hit stocks

Each time a bull-run occurs, the stock markets take along most of the market constituents on the joyride, regardless of company fundamentals and outlook. During the rally that began in March last year, many such companies found their stocks reaching sky-high prices, despite poor valuations. But now, the markets have taken a U-turn and reality has hit hard.

The Sensex began its downward slide on 7 April 2010 when it closed at a high of 17,970. On 24 May 2010, the Sensex closed at 16,470, down 8%. This bearish phase has taken the wind out of the sails of many stocks that were cruising along just about a month ago.

Among the worst hit in the Moneylife database of 1,334 companies is Syncom Healthcare, which was trading at a price of Rs95 before the markets caught a cold. Now, it finds itself down by 59%, at around Rs39.

Texmo Pipes and Products, which made its public listing on 10th March this year, has also lost its footing. It is now trading at Rs42, down 53% from its price on 7th April. Panoramic Universal and Amrutanjan Health Care have taken a massive beating. While Panoramic has crashed 50%, Amrutanjan has suffered a 48% erosion in market valuation.

Aban Offshore and BAG Films & Media have recorded a 44% and 43% fall, respectively, in their stock prices. Aban Offshore is now trading at Rs701 from its high of Rs1,251. The company is deep in debt and is paying the price of overexpansion of the previous run-up of oil prices in 2008. BAG Films has dropped from Rs26 to Rs15 during this period. The fact that it is controlled by Anuradha Prasad, wife of Rajeev Shukla, a former journalist and a Congress MP, has not prevented it from crashing.

KM Sugar Mills also finds its stock price trading 40% lower at Rs5. Investors are selling sugar stocks because of excess sugar supply. Educomp Solutions, which was flying high at Rs748 just over a month ago and was a ‘must-have’ concept stock for institutional investors, is now trading at Rs485, down a sharp 35%.

Interestingly, among the losers are two software stocks that had witnessed phenomenal growth during the record market rally. Mastek has lost 35% of its market valuation over this period while Crane Software International, which claims to be in high-end software, has suffered a 33% drop.

Supreme Industries - Hidden Value

Supreme Industries has strong earnings and also real-estate assets to encash

Even in a market that is supposed to be overvalued, there are smaller stocks that are undervalued for their level of growth. Supreme Industries is one such stock. Supreme operates in four segments—plastic pipes, packaging, industrial and consumer products. Its pipes are used for irrigation, bore-wells, portable water supply, plumbing, drainage, underground sewerage, rainwater harvesting and water management. The packaging division caters to the sports industry, electronics, food and textiles.

It manufactures dashboards and other components for the automobile sector which falls under the industrial category. Tata Motors and Mahindra & Mahindra are two customers in this sector. For the consumer goods sector, it produces plastic products for LCD TVs and air-conditioners. Over a period, Supreme has managed to set up 19 plants across India. It has recently expanded the capacity at its Halol, Silvassa, Gadegaon and Pondicherry plants and has also increased the capacity of injection-moulding machines and ancillary equipment. It has started a new factory at Jamshedpur for the ‘World Truck’ project of Tata Motors. Supreme Industries has restructured its business over the past couple of years by selling off unprofitable divisions and investing in the others. It divested its PVC film business at Malanpur (Madhya Pradesh), food service-ware plant in Daman and flexible film division at Pondicherry. It has developed its land in Andheri (West) in Mumbai by constructing a 10-storey commercial complex offering 2.5 lakh square feet area for sale. However, it has been able to sell only one office block out of 18, until now. It earned Rs20.5 crore from the sale of 13,106 sq ft of premises at an average realisation of Rs15,600 per sq ft. At this rate, the total revenue is projected at Rs390 crore. In its restructuring process, it has recently shifted its manufacturing unit for protective packaging from Nandesari in Gujarat to Pune in Maharashtra which has left it with another piece of land worth Rs1.5 crore that can be sold in future.

While the pipes business is largely volume-driven, profitability comes from the industrial and consumer segments. Because of the very nature of its business of manufacturing plastic materials, the company is subject to the volatility of the plastic raw materials prices. In FY08-09, the rise in raw material prices reduced the consumption of plastic, affecting sales. With the softening of raw material prices, it has been able to increase its sales in the past two quarters. Its operating margin is 16%. Its market-cap is 0.68 and 4.11 times its sales and operating profit, respectively. Return on equity is 34%. Worth buying.

UNQUOTED

Westlife Development (Rs33)
Westlife Development offers investment and allied financial services. In the December 2008 quarter, the company reported sales and operating profit of Rs74 lakh and Rs72 lakh, respectively. However, in the June 2009 and September 2009 quarters, sales declined sharply to Rs27 lakh and Rs10 lakh while operating profit was Rs24 lakh and Rs8 lakh, respectively. In the December 2009 quarter, sales plummeted to Rs1 lakh and there was an operating loss of Rs2 lakh. The company’s deteriorating performance is in sharp contrast to its stock price which has gained 4307% from 1 January 2009 to 27 April 2010. Trading volumes have been suspiciously inconsistent over this period.

Fast-moving consumer companies are fast-moving stocks in bourses too

Long considered as ‘defensive’ stocks meant to be held only as a cushion during a market collapse, FMCG companies are charting phenomenal growth and their stocks prices are keeping pace

It is common perception that stocks of fast moving consumer goods (FMCG) companies are defensive stocks. They often take a backseat to the more fancied and hyped growth stocks like software, automobiles or media. It is believed that these stocks should only be considered as a defence mechanism during bear phases. When the broader market is down, these stocks hold their ground reasonably well, offering stability to the portfolio while other stocks take a beating.
Well, the 'stability' logic still holds water. FMCG products, by their very nature, are essential for the daily requirements of all households-be it detergents, soaps, toothpaste etc. Demand for such bare essentials remains steady even during economic downturns. That is why these companies witness steady growth even when other industries are reeling from the consequences of a slowdown.

But, for years now, the performance of FMCG stocks has been far from defensive. It is time that FMCG stocks are stripped off this oft-repeated and generalised 'defensive' tag. Like their products, the stocks are fast-moving as well. Many of the stocks have surged to new all-time highs, outperforming the broader market indices handsomely.

Companies like ITC, Dabur, Godrej Consumer Products, Nestle and GSK Healthcare have performed quite well over the past five years. As a result, their stock prices have also exhibited phenomenal growth. In 2003, ITC was Rs40. Currently it is trading at Rs291. In 2006, GSPL was trading at Rs27 and now finds itself at Rs99. Similarly, Dabur and Nestle were trading at Rs12 and Rs500 in 2003-they are now trading at Rs192 and Rs2,811 respectively. GSK Healthcare, which is now trading at Rs1,655, was trading at Rs201 in 2003.

In the last quarter of the previous financial year the results have been especially great. While the Sensex has fallen by 2% between 4 January 2010 and 4 June 2010, the FMCG index has risen by a healthy 10%. Other sectoral indices like auto, banking and software have only risen by 6%, 7% and 2% respectively during this period. The future looks as bright. A KR Choksey report on the FMCG sector states, "We expect FMCG companies to continue their growth story with improvement in the overall economic scenario and consumer spending. With a likely normal monsoon as is expected by most experts, which would help cool off inflation, it will result in improvement in margins for all companies. Also, normal monsoons would increase the disposable income for rural consumers, giving them scope for more spending on consumer goods."

An Anand Rathi research report confirms, "With falling food inflation and a normal monsoon expected, we expect consumer companies to maintain the revenue growth tempo. However, we anticipate mounting competition to crop pricing power. With the fall in price of crude and lower raw material prices, margins would hold steady." According to KR Choksey, companies with a more diversified portfolio-both product-wise & geography-wise-would benefit more. This would include Nestle, GCPL, Tata Tea and Colgate.

Here is a brief look at the recent performance of some of the top FMCG companies. ITC reported a strong net profit growth of 27% y-o-y on the back of strong revenue growth in cigarettes, agri-business and FMCG businesses.

Revenues surged 30% while EBITDA increased by 25% y-o-y. The stock has reflected the strong growth momentum, surging 15% since its January opening.
Godrej Consumer Products Limited's (GCPL) revenues soared 48% on the back of robust growth in both domestic and international operations. Net profit jumped a phenomenal 55% while EBITDA also surged 52% y-o-y. GCPL's share price has also taken off, rising by 15% since January 2010.

Dabur is not far behind the growth curve either. Dabur's acquisition of Fem Care and strong volume growth boosted its top-line, which witnessed a 17% rise in the financial year 2009-10. Its EBITDA also expanded by 28% due to lower input costs. Dabur's stock has seen a 20% jump since January.

GSK Healthcare has also reported good numbers for the previous financial year. Strong volume growth in biscuits and nutrition supplements and improved realisations boosted its top-line by 20% while net profit rose by 15% y-o-y. Its stock price has surged 26% since January.

Face value Rs 50 as on 09/06/2010

Group	Company Name	Face Value	BSE	NSE
		In Rs	Close	Close
B	RAVALGAON	50	6,962.00	-

Face value Rs 100 Stocks as on 09/06/2010

Group	Company Name	Face Value	BSE	NSE
		In Rs	Close	Close
T	BOMBAY OXYGEN	100	6,901.00	-
T	KAYCEE IND	100	4,160.00	-
S	LAKSHMI MILL	100	2,532.95	2,568.90
N	RELIANCE GOLD EXCH	100	0.00	1,795.15
N	SBI GOLD EXCH.TRADED SCHM.	100	0.00	1,876.10
Z	SOUTHERN GAS	100	231.25	-
B	VICTORIA	100	3,275.00	-
T	WALCHAND CAP	100	1,725.00	-
B	ZANDU REALTY	100	3,103.30	3,097.90

LIKELY MNCs WHICH WILL DELIST

Post the mandate of 25% public float, in today’s market most of the MNCs are buzzing high. Expectations are huge that many of them would go in for delisting. Infact even Indian companies like Suashish Diamonds are up on expectations that it would go for delisting.

The buzz word today on the floors of Dalal Street is ‘delisting’. And lets take a quick look at what exactly it means when we say a company is going in for delisting.

In simple layman terms, delisting means removing the shares from trading on the stock exchanges. This delisting could be voluntary or involuntary. Voluntary delisting happens when promoters or the acquirers get the approval of the shareholders by a special resolution to delist itself. As per the norms, if public float goes down to 10% or below, the acquirer then has the option to buy the outstanding shares from the remaining shareholders at the discovered offer price. This gives an exit route for the investors but when it is delisting at the behest of the stock exchange, due to violation of norms, then investors are stuck. Offer price has the minimum base price or floor price, based on 26 weeks average traded price, without a maximum price. But companies delisting themselves from regional stock exchanges do not have to provide any exit prices for investors as the stock continue to remain listed in the BSE and NSE. It is only when it is delisted from these two exchanges that exit route is offered.

Given below is a list of MNCs which will have to necessarily either reduce promoters holding to 75% or if they do not want to reduce their stake, go for delisting.

Astrazeneca Pharma		97.91%
Lotte India Corporation		93.09%
HSBS Investdirect		92.89%
Fresnius Kabi		90%
BOC India		89.48%
Gillette India		88.73%
Elantas Beck India		88.55%
Kennametal India		88.16%
Foseco India		86.48%
Saint-Gobain Sekurit India		85.77%
Fairfield Atlas		83.91%
Atlas Copco		83.77%
Ineos ABS (India)		83.88%
Honeywell Automation		81.24%
Blue Dart Express		81.03%
Oracle Financial Ser Soft		80.47%
Novartis India		76.42%
Timken India		80.02%
Sulzer India		80.03%
Sharp India		80%
Alfa Laval (India)		76.73
3M India		76%
GMM Pfaudler		75.62%

Suashish Diamonds is not a MNC but it is sure to go for delisting. Promoters’ stake in the company currently stands at 89.43%. The company had contemplated delisting in Oct 2009 but it did not go through after Ashish Goenka, the promoter and acquirer decided not to accept the discovered price (being the price at which the maximum number of shares was tendered) of Rs.320 per share established by the book building process on the BSE.

Delisting buzz spurs MNC stock prices

Share prices of listed multinational companies (MNCs), with a public shareholding of less than 25%, surged on Monday with the Street speculating that foreign firms would opt to delist their shares rather than take up the float to 25%.

Barring two companies, all MNC stocks were big gainers, rising 6% on an average, even as the benchmark indices lost 2%. “Foreign promoters will pay healthy valuations if they have to exit and that’s why MNC stocks rallied,” said Jagannadham Thunuguntla, equity head, SMC Capital. There are about 23 MNCs listed on the Indian bourses which have promoter holding of greater than 75%.

However, even as MNCs gained handsomely, the public shareholding norm seems to have negatively impacted public sector undertakings. Stocks such as MMTC, NMDC, Hindustan Copper and SAIL, which will have to offload the maximum to hike their public shareholding to 25%, declined close to 4% each. All these stocks have very low public float and hence are trading at a relatively premium. Also, private sector companies like DLF crashed 6%. Tata Motors fell 4% while Reliance Power lost 2%.

The government on Friday made it mandatory for all listed companies to have a minimum 25% public holding. Listed companies with less than 25% public holding will be required to reach the stipulated level by enhancing their public holding by a minimum 5% every year. MNCs such as INEOS ABS (India) and Fairfield Atlas, both with over 83% promoter holding, gained 14% on Monday’s trade. Astrazeneca Pharma, BOC India and Gillette India, with promoter holding of close to 90%, gained over 6% each.

Some market experts, however, feel companies may gain as the higher float would attract new funds.

“If the free float increases, funds won’t mind buying the stocks because they would become more liquid,” explained Deven Choksey, managing director at KR Choksey Securities. “Further, PSUs don’t need a government nod each time they have to divest, they can sell shares whenever they wish.”

There are mixed opinions on whether the market can absorb such a large quantity of paper, estimated at Rs 58,000 crore over the next 12 months. "The high levels of capital raising are likely to be a drag on the secondary markets. With incremental flows strongly dependent on the global situation, there could be few takers for the supply, which is 33% higher than in 2009," said a note by Religare Capital Markets. Experts also said the new norms could dissuade companies wanting to list and crimp the valuation of mid- and small-cap firms.

The government's disinvestment plan could also be hit. "Investor preference for incremental offering in listed entities would tend to hold back planned new listings. Further, certainty of this capital on offer in many large-caps would tend to be a drag on their valuations, while holding back incremental investments into mid-caps," it said. These public offers from listed companies are seen as reducing the appetite for new offers.

Large issuances in the private sector (35 in all in the BSE500) are expected in IT Services (Wipro, Oracle Fin), real estate (DLF), utilities (Reliance Power, JSW Energy) and capital goods (Mundra Port). The new norm could force companies to raise as much as $60 billion by selling stakes over the next few years, according to an estimate by Prithvi Haldea, CMD, Prime Database. Analysts also note that it is not an ideal situation for such large number of stake sales, as there are already too many issues lined up for sale. Several multinational companies have listed their Indian units and retained more than a 75% stake.