25% Public Float in India : Is the timing right ?

The Securities Contracts (Regulation) Rules (SCRR), 1957 was recently amended to incorporate a minimum 25% public float for all listed companies – private and public. The amendment also applies to listed statutory corporations. Public float is defined as that part of a listed company’s shares that are not held by the promoter. The proposal to push for a 25% public float had been around for some time now, and it has finally seen the light of the day, with the proposal turning into a law with a strong push from the Finance Ministry. There is little doubt about the objectives of the amended law – greater public float creates deeper public markets, making the markets more efficient, thereby reducing the cost of raising funds. However, the crucial question that is being asked now is about the timing of the amendment, and about the time-frame given to companies to comply with the new law. While equity markets all around the world still appear shaky and offer no compelling signs of recovery from the financial crisis, it appears that the amendment is a tad hasty. It is not very convincing that the next 2-3 years is the best time to dilute shareholding, especially given the volatility and the subdued valuations. The criticism is equally about the short time-frame (2-3 years on average) given to the companies to comply. This compliance is estimated to raise money in excess of Rs. 1.6 trillion. Companies might be unable to put the forcefully raised money to any better use. The premise that ‘greater public float results in greater liquidity’ also appears shaky. Higher public float might discourage many companies which are more comfortable with smaller divestment from listing. Also, listed companies which do not want to divest at the moment, might rather prefer to delist than comply with the new law. This might in fact result in lower liquidity. While the objectives of the amendment are noble, and definitely in the right direction towards creating more mature equity markets, the government should have waited for more convincing signs of global economic recovery before making the law.

Recent Developments in the Australian Capital Markets

Capital markets worldwide have undergone radical transformation over the last decade with heightened competition among the stock exchanges. This has mostly been a US-Europe phenomenon with the Asian exchanges landscape being dominated by national exchanges. However, the situation is slowly changing. Recently Australia undertook initiatives towards making its securities market more competitive by breaking the monopoly enjoyed by the Australian Securities Exchange (ASX). Till now the ASX was responsible for surveillance of trading activity in Australia; but according to a new legislation, the Australian Securities and Investments Commission (ASIC) will now take over the supervisor role from ASX. This decision, which took over two years’ assessment and deliberation, was necessary to allow new competitors of ASX to enter and access the securities market. As a result, Chi-X Australia has already received an approval from the government and will possibly be the first player to enter into this evolving market. A US institutional broker Liquidnet and a New Zealand Stock Exchange backed platform are also seeking licenses to operate in the Australian market. Amidst this evolution, ASX has taken a number of initiatives to meet the new challenges of a competitive environment and maintain its stronghold in the market. Recently it consulted with a broad range of market participants, end-users, vendors as well as regulators to improve its service offerings. Besides deciding to slash its main trading fees the ASX is planning to launch three new trading platforms by 2011, each targeted at different customer segment. VolumeMatch, a block matching facility that allows matching of orders anonymously, is targeted towards sell side players. TradeMatch, an ultra-low latency, high capacity, trading platform that will provide a full functionality trade execution for all ASX-quoted securities, is scheduled to be launched in November, 2010. Third is PureMatch, an adjacent ultra-low latency execution facility for the top 200 ASX listed securities. It is targeted at high frequency traders and scheduled for release in early 2011. These developments can be potential game changers in the Australian context. They can also bring major changes in other Asian countries as regulators in the region will be keeping a close eye on Australia.