Government exempts PSUs from MPS requirement

This was an aspect that was awaiting clarification from the government for a long time. Finally, the government has clarified that Public Sector Undertakings (PSUs) and Public Sector Banks (PSBs) would be entirely exempted from minimum public shareholding rules. The current rules stipulate that once a company goes public or undergoes a substantial change in control, then at least 25% of the shareholding must be held by the public. That means, the promoters in such cases would have to reduce their stake to below 75%, so that public shareholding would be at least 25%. There was a grey area on this front and it was not too clear what would constitute public holdings and would they be subject to MPS.

Now there is an explicit clarification from the government and it has also implemented necessary changes to the Securities Contract Regulation Act (SCRA). The government has announced that it has explicitly exempted public sector entities (PSUs and PSBs) from the Minimum Public Shareholding (MPS) requirement. This MPS requirement mandates that at least 25% public float for all listed companies i.e. it should be held by the public. That means, this should come as a blessing in disguise for public sector companies that the government plans to divest. The most striking beneficiary of this decision would be IDBI Bank, where there was a lot of uncertainty about the MPS issue post the stake sale.

This announcement is going to also be important as it also stipulates that the exemption would apply on PSUs and PSBs regardless of whether the government holding in the company is direct or indirect. This is specifically relevant for the IDBI Bank divestment. For example, the government of India and LIC jointly hold 94.72% of shares with the balance 5.28% held by the public. The government and LIC jointly plan to sell 60.72% out of the 94.72% they jointly hold in IDBI Bank. The moot question was whether the shareholding of LIC would also be calculated as government shareholding or as private shareholding, since the applicable of the MPS norms would depend on that classification.

Now there is total clarity on this front. In the case of IDBI Bank, the potential buyer / buyers will have 60.72% and then make an open offer to buy out the balance 5.28% from the public. Post the sale, if the open offer is fully successful, the new buyer will hold 66% in IDBI Bank and LIC and the government combined would hold 34%. In this case, since LIC is 97% owned by the government of India, it would also be proportionately treated as government stake. Hence with the current joint holding of 94.72% between LIC and the government of India, the sale of IDBI Bank to the new buyer would be entirely exempt from the ambit of minimum public shareholding (MPS) norms.

This could have larger positive ramifications for the government disinvestment program since most of the potential buyers of PSUs are asking for more time adhere to the MPS norms. Now that issue has been settled. As per the notification, all companies would be exempted from the requirement of MPS post listing / sale if the Central Government or State Government or public sector company, either individually or in any combination with other, hold directly or indirectly, majority of the shares or voting rights and exercise majority control of such listed companies. Since such companies would be exempted from all MPS provisions, it would be a major boost to the divestment process.

The amended rules would go under the nomenclature of Securities Contracts (Regulation) Amendment Rules, 2022; notified on 02nd January 2023 by the government of India. In this case, IDBI Bank would be exempt from the minimum public shareholding (MPS) norms even after partial stake sale by LIC and the government, since the LIC stake would also classify as public sector holding now. However, the benefits of this change will not only be restricted to the IDBI case, but would extend across all the potential PSUs where such issues could creep in. This is more so in the case of a strategic sale of listed companies where the ownership is likely to pass on from the government backed entities to the private sector.