Introduction:
The Securities and Exchange Board of India (SEBI) is a key player in the governance and monitoring of the Indian Stock market. As the watchdog of investors' interests, the regulatory body ensures the effective and smooth functioning of all stock markets in India.
All listed companies can trade their stocks only through the stock markets. An important change brought about by SEBI in 2022 was the introduction of a revised Minimum Public Shareholding (MPS) rule. Understanding this rule is important for investors since it allows for greater public participation in listed company share trading.
Read on to learn what this rule means, its importance, and its evolution.
What's the MPS Rule?
All publicly listed companies in India must abide by the MPS rule, which states that 25% of the total outstanding equity shares must be held by the public. The word public refers to all shareholders who aren’t promoted by the said listed company. In an instance where promoters hold more than 75% of the shares, they must divest the additional interest to ensure 25% of the shares are available to the public.
The MPS rule was enacted through an amendment to the Securities Contract Regulation Rules in 2010 by SEBI. This rule states that in any Indian listed company, apart from public sector undertakings, promoters holding more than 75% of the shares must compulsorily sell their holdings over 75%. Compliance with this requirement can be fulfilled by the promoters either through a rights issue or by placing additional shares with institutions.
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Importance of MPS Rule
Though the Indian stock market consists of over 5,000 listed companies, share liquidity is quite low beyond the top 200 companies. A primary cause for this is that holdings are primarily concentrated with the promoters of listed companies. In turn, this reduces the volume of stocks that listed companies can trade. Increased power vested in the hands of promoters also means reduced corporate governance.
The MPS rule was enacted to counteract the above-mentioned and offer the following benefits.
- The MPS rule is needed to ensure adequate free float in listed companies, which will ensure stock liquidity in trading. This will support price discovery in the market and retain market integrity.
- It also reduces the control of promoters on listed companies and improves corporate governance. MPS rules do this by giving institutional and public shareholders a more active role in corporate decisions.
- Another benefit of the MPS rule is it reduces the risk of stock price manipulation through free float. This increases the scope for investment opportunities in the stock market by increasing the supply of shares formerly held by only the promoters.
Evolution of MPS Rule
The MPS rule was introduced by the government in 2010 to ensure all listed companies have at least 25% public shareholding. Initially, the only exception to this rule was public sector undertakings, which were permitted to maintain MPS of 10%.
In June 2013, a SEBI review discovered that over 105 private sector companies failed to comply with the requirement. Subsequently, notices were issued to all of them. All Indian companies were given time until August 2018 to adhere to SEBI’s 25% MPS rule. However, even public sector undertakings were included in the ambit of the new MPS rule and were asked to fulfill the condition of at least 25% public shareholding by August 2018.
Non-adherence to the MPS rule led to stringent penalties imposed by SEBI, such as freezing promoters' shares and putting a bar on such promoters from holding any other directorships. This deterrent resulted in increased compliance with the MPS rule. Additionally, in 2019, the government wanted to increase the MPS limit to 35%, but this was met with protests. The increase to 35% MPS was believed to cause a drastic influx of shares on the market, resulting in a reduction in value, due to which, the MPS is fixed at 25%.
Conclusion
The MPS rule plays a pivotal role in the regulation and governance of stocks traded by listed companies. From increasing market liquidity and transparency to better corporate governance, the MPS rule reduces the concentration of power in the hands of the promoters. In turn, this creates greater accountability and increased public participation. When executed effectively, the MPS rule is an essential tool to strengthen the stock market's integrity while safeguarding the interests of all shareholders.
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