SEBI allowed its listed companies to use new methods of share sales through MPS rule.
What is MPS rule?
The Minimum Public Shareholding (MPS) rule requires all listed companies in India to ensure that at least 25% of their equity shares are held by non-promoters (public).
This rule was implemented after the amendment of Securities Contracts Regulation Rules by SEBI in 2010.
Under this rule promoters with a strangle-hold on listed companies were asked to compulsorily sell down their stake by placing shares with institutions or issuing rights or bonus shares.
What is the significance of the rule?
India has 5000 listed companies but the market depth is very low.
Thus stocks beyond the top 150/200 are less traded.
Due to this, high promoter holdings prevail and the float available for trading by the public is very limited.
SEBI is hoping to improve market depth and liquidity by unlocking this free float.
Forcing promoter to relax their grip on listed companies can improve corporate governance by giving public shareholders and institutions greater say in corporate actions.
There is very few investment opportunities in the stock market and so forcing promoters to sell shares would improve the supply of shares.
MPS rule ensures better liquidity, price discovery and governance in the stock market.
What are the challenges with this rule?
Initially PSUs were allowed a 10% MPS, but have recently been asked to comply with a 25% MPS by August 2018.
Review by SEBI in June 2013 also found that over 105 private sector firms hadn’t fallen in line and it issued notices to them.
Instead of addressing the compliance issues SEBI is keen to further expand the mandatory MPS to 30 per cent or even 35 per cent.
SEBI also imposes penalties to the company which is non-complaint by freezing the promoter shares and barring promoters from any directorships.
