SEBI’s higher free float recommendations and challenges for some companies
Recently, the shares of Ruchi Soya Industries, increased to 450% after it got relisted following its acquisition by Pantanjali Ayurved under the Corporate Insolvency Resolution Process (CIRP). After relisting, the company had less than 1% public shareholding. This was criticized by many experts for allowing the company to operate with such low free float (public shareholding).
Higher free float in a listed company is desirable as it ensures fair price discovery and also helps prevent manipulation. In this backdrop, SEBI proposed a higher free float proposal i.e. increasing the number of shares to be owned by public shareholders after the Corporate Insolvency Resolution Process (CIRP) of a company. Presently, those relisting after CIRP are given up to 18 months to achieve a 10 per cent Minimum Public Shareholding (MPS). The following three options are proposed by SEBI out of which one has to be chosen by the companies who have undergone the CIRP:
- First, companies should achieve at least 10 per cent public shareholding within six months of re-listing.
- Second, companies need to have at least 5 per cent MPS after relisting which needs to be hiked to 10 per cent within a year, and 25 per cent in the following two years.
- And, third, companies having at least 10 per cent public float at the time of relisting of their shares, and 25 per cent thereafter in three years.
However, it has been pointed out by the experts that the options proposed by the market regulator is challenging for the companies, which have just emerged out of the CIRP. It has been further opined that even the normal companies have struggled to maintain the MPS over the years, with SEBI extending the deadline for such compliances.
Hence, it has been suggested by experts that alternatively SEBI can restrict trading in the stock or impose a lower threshold of circuit breakers until MPS reaches, say, 5 per cent or 10 per cent. Circuit breaker is a process in which the trading in a particular stock can be suspended for a brief period when a huge volatility in the price of that stock is witnessed.
