The government has significantly diluted the minimum 25 per cent public shareholding rule it

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had notified on June 4. The finance ministry on Monday changed the minimum public holding in listed public sector undertakings (PSUs) to 10 per cent.

Another dilution allowed all listed companies, whether in the private or public sector, to comply with the minimum requirement any time in the next three years. The June 4 notification required companies to raise their public shareholding by a minimum of 5 per cent every year and make it 25 per cent in three years.

Prithvi Haldea, managing director of Prime Database, said, “The government perhaps thought it would be able to force PSUs to disinvest and reduce the fiscal deficit. But opposition seems to have come from many affected PSUs, under different ministries, as they were not keen to disinvest.”

In a June 2009 speech to Parliament, president Pratibha Patil had clearly stated, “Our fellow citizens have every right to own part of the shares of public sector companies while the government retains majority shareholding and control. My government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that the government equity does not fall below 51 per cent.”

The stock market is likely to be disappointed with the government’s reversal. “The 25 per cent rule for all companies was a step forward. Our cash market has the least depth among all countries and a higher public shareholding would have deepened it. By exempting PSUs, whose market cap forms a good part of the total market cap, you are exempting a large part of the listed market,” said Saurabh Mukherjea, head of Indian equities at Execution Noble.

Haldea said the June 4 notification had exempted new issuers, with a post-issue market cap of more than Rs 4,000 crore, to continue having just 10 per cent public shareholding. “The government created a mess then and has now added to it,” said Haldea.

He was referring to the removal of the annual condition of a minimum 5 per cent additional public holding, which now stands replaced with a condition that allows a company to reach the minimum 25 per cent any time in three years.

“What if these companies wait for the third year and then use the excuse of bad market conditions to get a further extension?” asked Haldea.