Budget 2019 turned out to be negative for the stocks markets for multiple reasons. One of the key drivers for the sharp fall in the Nifty and the Sensex post the Union Budget was the proposal to further increase the Minimum Public Shareholding (MPS) for listed companies from 25% to 35%. What exactly is this MPS rule in share market and why is it so significant?
Understanding the MPS rule in India
The Minimum Public Shareholding (MPS) rule is applicable to all listed companies in India. As per the rule, 25% of the outstanding equity shares of the company must be compulsorily held by the public. Here ‘public’ is defined as non-promoter shareholders. Where promoters are holding more than 75%, they have to mandatorily divest additional shares to the public to comply with the MPS rule.
This MPS rule was first implemented after the amendment to the Securities Contracts Regulation Rules by SEBI in 2010. As per this rule, promoters of listed Indian companies (other than PSU companies) holding more than 75% had to compulsorily sell their additional holdings to bring it down to maximum 75%. Such stake reduction could be done either by placing shares with institutions or by issuing rights shares to dilute their holdings.
MPS rule is intended to enhance liquidity in stocks?
One of the objections of market players has been that liquidity in the Indian markets is very low if you go outside the top 200 companies. This is despite India having over 5000 listed companies in the stock market. This is largely because the holdings are still concentrated with promoters and promoter groups. Limited public shareholding reduces the volumes in the stock market. The MPS rule was brought in essentially to reduce this promoter domination and ensure that stocks are widely held and hence more liquid.
There is also a corporate governance perspective to this move. Compelling promoters to relax their grip on listed companies will improve corporate governance by giving institutional investors a greater say in corporate actions. This will ensure better alignment between the objectives of the company and the objectives of the minority shareholders. Additionally, it will also ensure better monitoring of companies and offer more investment opportunities in the stock market. To cut a long story short; the minimum public shareholding rule ensures better liquidity, price discovery and governance in the stock market.
How the MPS rule evolved over the years?
The MPS rule has had an interesting evolution in India over the last decade, since it was first mooted.
- The rule was first promulgated in the year 2010 and all listed companies were asked to ensure minimum 25% public shareholding with only the PSUs permitted to maintain MPS at 10%
- A subsequent review by SEBI in June 2013 found that over 105 private sector companieshad not fallen in line and accordingly notices were issued to them
- Indian companies were asked by SEBI to adhere to 25% MPS by August 2018. This was a huge jump in public shareholding requirement. Only PSUs were allowed a 10% MPS; but have recently been asked to comply with a 25% MPS by August 2018.
- SEBI imposes penalties on companies that are non-complaint by freezing the promoter shares and barring such promoters from other directorships. This is a significant deterrent.
- In the Union Budget 2019, the government had asked SEBI to explore the possibility of expanding the mandatory MPS limit to 35%. However, this was not well received by the stock markets as they expected a glut of shares to flood the market and depress valuations.
Due to popular protests, the government was forced to pull back the 35% proposal but the 25% MPS requirement still remains.
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