Minimum Public Shareholding (MPS) Rule for Indian equities

Did you know that it is mandatory for all public companies to give a minimum participation to the public? Why was this rule needed? What advantages does it have? Read on...

What is Minimum Public Shareholding (MPS) rule?

As per the MPS rule, 25% of the outstanding equity shares of the company must be compulsorily held by the public. Here ‘public’ is defined as non-promoter shareholders. 

What if promoters are holding more than 75% shares?

Where promoters are holding more than 75%, they have to mandatorily divest additional shares to the public to comply with the MPS rule.

History of MPS Rule

This MPS rule was first implemented after the amendment to the Securities Contracts Regulation Rules by SEBI in 2010. As per this rule, promoters of listed Indian companies (other than PSU companies) holding more than 75% had to compulsorily sell their additional holdings to bring it down to maximum 75%. Such stake reduction could be done either by placing shares with institutions or by issuing rights shares to dilute their holdings.

What is a PSU?

PSUs (Public Sector Undertakings) are government-owned corporations in India, in which 51% or more than 51% of the paid-up share capital is owned by the government of India. However, it can be only the central government or only the state government of any state or central government with any state government or state governments.

PSUs are classified as Central public sector undertakings (CPSUs, CPSEs) which are wholly or partly owned by Government of India or State Level public sector undertakings (SLPSUs, SLPSEs) which are wholly or partly owned by state or territorial governments.

Some of the examples of PSU companies are ONGC, NTPC, SBI, BHEL, SAIL, Allahabad Bank etc.

PSUs are different from Government companies in the sense that government companies are 100% owned by the government and no public holdings are possible in such companies. e.g., Indian Railways are 100% government owned.

Need for MPS Rule

One of the objections of market players have been that the liquidity in the Indian markets was very low, if we go outside the top 200 companies. This is despite India having over 5000 listed companies in the stock market. This is largely because the holdings are still concentrated with promoters and promoter groups. Limited public shareholding reduces the volumes in the stock market. The MPS rule was brought in essentially to reduce this promoter domination and ensure that stocks are widely held and hence more liquid.

There is also a corporate governance perspective to this move. Compelling promoters to relax their grip on listed companies will improve corporate governance by giving institutional investors a greater say in corporate actions. This will ensure better alignment between the objectives of the company and the objectives of the minority shareholders. Additionally, it will also ensure better monitoring of companies and offer more investment opportunities in the stock market. 

To cut a long story short; the minimum public shareholding rule ensures better liquidity, price discovery and governance in the stock market.

Why not increase the MPS limit?

In the Union Budget 2019, the government had asked SEBI to explore the possibility of expanding the mandatory MPS limit to 35%. However, this was not well received by the stock markets as they expected a glut of shares to flood the market and depress valuations.

Due to popular protests, the government was forced to pull back the 35% proposal but the 25% MPS requirement still remains.

Applicability and recent amendment.

MPS rule is applicable to all listed companies in India, except PSUs, as we just saw.

The latest news of 2023 is that the exemption to the minimum public shareholding (MPS) rule was so far available only to government-controlled PSU companies. The amendment, notified recently, extends it to even after the sale of government stake, is expected to make it more attractive for investors to acquire state-run companies. The immediate beneficiary is likely to be IDBI Bank, where the government has started the privatization process. IDBI Bank is already listed, but after privatization, it would have required to meet the requirement within three years had the rule not been amended.

Summary

MPS rule improves governance, liquidity and tries to protect the common shareholder. It is important to understand the rule and also important to check for the rule being applied by the company before you shortlist a stock for investing. You can verify the same by checking and ensuring that the promoter shareholding has always stayed below 75% after 2010.

Regards

Manoj Arora
Official Website