by Sudipto Banerjee, Sarang Moharir, Renuka Sane.
In 2009-10, the government of India increased the minimum public shareholding (MPS) threshold for listed companies from 10% to 25%. The government’s rationale for the MPS is that a minimum public float of shares addresses secondary market imperfections like concentration of shares and price manipulation. The Securities and Exchange Board of India (SEBI) has specified several methods that listed firms can use to expedite their MPS compliance. One of the methods is the offer for sale of shares through the stock exchange (OFS-SE). This was introduced in 2012 to facilitate compliance in a broad-based and transparent manner. Prior to the OFS-SE, the government divested shares through OFS by issuing a prospectus. This was a cumbersome and time-consuming process. Since 2012, the government has used the OFS-SE method to undertake disinvestment of CPSEs to meet the MPS threshold.
In 2010, when the Securities Contract (Regulations) Rules were amended [Rule 19A(1)] to increase the MPS threshold from 10% to 25%, listed Central Public Sector Enterprises (CPSEs) were exempted. The government withdrew the exemption in 2014, and set a deadline of August 2017 for compliance with the MPS. This was extended by a year to 2018 and again by two years to 2020. Recently, listed CPSEs got another extension of one year till August 2021. Despite the extensions, 37 CPSEs out of the total 77 listed CPSEs had not met the MPS requirement as on December 31, 2019.
As we approach the August 2021 deadline, we ask if disinvestments through the OFS-SE route have achieved the 25% MPS target. This question is relevant for all disinvestments. We, however, focus on the one’s done through OFS-SE as this route was designed to meet the MPS threshold. This study is useful for two reasons. First, it gives us a sense of how much more disinvestment the government has to undertake to meet the MPS. Second, the government’s record on meeting the MPS threshold for CPSEs sends a strong signal of its own commitment to the MPS.
We sourced transaction data from BSEPSU. We only consider CPSEs where at least 5% stake was divested through the OFS-SE route between 2012 and 2019. This gives us a sample of 22 CPSEs (with 31 transactions) out of the total 77 CPSEs.
Since OFS-SE is a secondary market transaction, details like name of the purchaser, the number of shares purchased and the final sales price are not available in the public domain. Therefore, we studied each annual report issued in the year of the OFS-SE transaction to document the change in the shareholding pattern of the top ten shareholders. Further, we used these changes to identify the possible purchaser of shares. For example, 5% stake of Power Finance Corporation (PFC) was divested in 2015; LIC’s shareholding in PFC increased from 4.81% to 9.08% in the same year. We assume that LIC purchased a stake in the OFS-SE transaction of PFC in 2015.
Results: other CPSEs as shareholders
Table 1 shows the shareholding of CPSEs that had undergone OFS-SE as of March 2019. Public shareholding contains CPSE shareholding (column 4) i.e., shares held by other CPSEs in these companies. Since CPSEs are themselves government owned, it is useful to evaluate public shareholding after removing their holdings. As an example, National Fertilizers Ltd. has a public shareholding of 25.29% and meets the MPS requirement of 25%. The following CPSEs are listed under the public shareholding category of National Fertilizers Ltd., i.e. LIC (11.31%), NIA (1.76%), GIC (1.48%), Canara Bank (0.69%), OIC (0.29%). The total share of these firms (15.53%) is deducted from the public share of National Fertilizers (25.29%). Public shareholding of National Fertilizers at 9.76% does not meet the MPS threshold. When the share of CPSEs is excluded from the public shareholding category, 13 out of the 22 CPSEs failed to meet the MPS requirement as of March 2019.
|Company||Promoters’ share-holding||Public share-holding||Shareholding of CPSEs (included within public shareholding)||Whether MPS requirement is met when share of CPSE is not considered?|
|BHARAT ELECTRONICS LTD.||55.93%||44.07%||LIC (3.61%)||Yes|
|COAL INDIA LTD.||69.26%||30.74%||LIC (10.94%), LIFE INSURANCE CORPORATION OF INDIA P & GS FUND (2.18%)||No|
|CONTAINER CORP. OF INDIA LTD.||54.80%||45.20%||LIC (3.08%)||Yes|
|ENGINEERS INDIA LTD.||52.00%||48.00%||LIC (4%)||Yes|
|HINDUSTAN COPPER LTD.||76.05%||23.95%||LIC (12.14%)||No|
|INDIAN OIL CORP. LTD.||51.50%||48.50%||ONGC (14.20%), LIC (6.51%), OIL (5.16%), IOC SHARES TRUST (2.48%)||No|
|INDIA TOURISM DEVELOPMENT CORP. LTD.||87.03%||12.97%||LIC (3.22%), NIC (0.13%)||No|
|MMTC LTD.||89.93%||10.07%||LIC (3.39%), UIC (0.24%), GIC (0.18%), NIA (0.11%)||No|
|MOIL LTD.||65.69%||34.31%||LIC NEW ENDOWMENT PLUS BALANCED FUND (7.12%), UIC (1.05%), NIA (0.35%), OIC (0.46%)||Yes|
|NATIONAL ALUMINIUM CO. LTD.||52.00%||48.00%||LIC (8.2%), NIC (0.61%)||Yes|
|NATIONAL FERTILIZERS LTD.||74.71%||25.29%||LIC (11.31%), NIA (1.76%), GIC (1.48%), CANARA BANK (0.69%), OIC (0.29%)||No|
|NBCC (INDIA) LTD.||65.93%||34.07%||LIFE INSURANCE CORPORATION OF INDIA P & GS FUND (6.55%), SBI(0.48%)||Yes|
|NHPC LTD.||73.33%||26.67%||LIC (7.31%), PFCL (2.43%), REC (1.75%)||No|
|NLC INDIA LTD.||80.85%||19.15%||LIC (3.34%), UTI (0.83%), NIA (0.47%)||No|
|NMDC LTD.||72.28%||27.72%||LIC (12.9%), LIC NEW ENDOWMENT PLUS BALANCED FUND (2.03%), SBI (0.38%), NIA (0.34%)||No|
|NTPC LTD.||54.50%||45.50%||LIC JEEVAN PLUS NON UNIT FUND (11.51%)||Yes|
|OIL INDIA LTD.||59.57%||40.43%||LIFE INSURANCE CORPORATION OF INDIA P & GS FUND (12.19%), IOCL (4.71%), HPCL (2.47%), BPCL (2.47%)||No|
|OIL & NATURAL GAS CORP. LTD.||62.98%||37.02%||Yes|
|RASHTRIYA CHEMICALS AND FERTILIZERS LTD.||75.00%||25.00%||LIC (2.07%), NIA (0.60%)||No|
|REC LTD.||52.63%||47.37%||LIC (2.30%), CPSE ETF (3.57%)||Yes|
|STATE TRADING CORP.OF INDIA LTD.||90.00%||10.00%||LIC (0.91%), NIA (0.89%), OIC (0.07%)||No|
|STEEL AUTHORITY OF INDIA LTD.||75.00%||25.00%||LIC (9.60%), LIC MARKET PLUS 1 GROWTH FUND (1.24%), LIFE INSURANCE CORPORATION OF INDIA P & GS FUND (0.63%)||No|
Source: Company Annual reports
Results: LIC as shareholder
Table 2 indicates an increase in shareholding of LIC (whose 100% shares are held by the government) in the CPSEs post OFS-SE transactions. As an example, Hindustan Copper went through disinvestment in FY16 and FY17. This lead to a decrease in government shareholding from 89.95% in 2016 to 76.05% in 2017, at the end of the two transactions. Shares of LIC increased from 5.27% at the beginning of FY16 to 12.14% in FY18. Similarly, National Fertilizers was disinvested in FY17, where the government’s share decreased from 92.5% to 80%. Shares held by LIC in the company had increased from 4.16% to 11.32% in FY18.
|Name of entity||Year||Stake divested||LIC’s share before disinvestment||LIC’s share post disinvestment|
|RASHTRIYA CHEMICALS AND FERTILIZERS LTD.||FY13||12.5%||0.87%||6.45%|
|COAL INDIA LTD.||FY15||10%||2.10%||7.24%|
|DREDGING CORP. OF INDIA LTD.||FY15||5%||2.99%||5.86%|
|POWER FINANCE CORP. LTD.||FY15||5%||4.81%||9.08%|
|HINDUSTAN COPPER LTD.||FY16||7%||5.27%||10.70%|
|CONTAINER CORP. OF INDIA LTD.||FY16||5%||1.03%||3.05%|
|HINDUSTAN COPPER LTD.||FY17||6.83%||11.14%||14.25%|
|NATIONAL FERTILIZERS LTD.||FY17||15%||4.16%||11.32%|
|COAL INDIA LTD.||FY18||5.19%||8.97%||10.94%|
Source: Annual reports
In the sample of 31 transactions concerning the 22 CPSEs selected for our study, the Life Insurance Corporation (LIC) increased its holding in 16 transactions. For six transactions, the top ten shareholders’ names were not disclosed in the annual reports. LIC’s equity did not change in the remaining nine transactions.
Out of the total 77 NSE-listed CPSEs, 37 CPSEs had not met the MPS threshold as on December 31, 2019. The government will have to do a lot more to achieve full compliance with the MPS by August 2021. Out of the 22 CPSEs that went through disinvestment by the OFS-SE route, 13 CPSEs do not meet the MPS once we exclude the share of CPSEs. LIC purchased equity in more than 50% of CPSEs in our sample.
One of objectives of disinvestment is to promote public ownership of CPSEs. This also provides an opportunity to citizens to participate in the wealth of CPSEs. The MPS also seeks to widen ownership in listed companies. Under the Securities Contracts (Regulation) Rules and SEBI (Issue of Capital and Listing Disclosure Requirements) Regulations, shareholding of CPSEs and LIC may be considered as public, but their inclusion does not align with the goals of either disinvestment or the MPS. This question also assumes relevance given CAG’s recent observation (Para 1.3.2) that disinvestment from one public sector firm to another ‘did not change’ stake of the government in the disinvested CPSEs. Disinvestment which truly widens CPSE ownership to individuals and institutions outside of the government should be an important goal for policy.
The authors are researchers at the National Institute of Public Finance and Policy. The authors would like to thank Karthik Suresh and Srishti Sharma for useful discussions.
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