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Business sees red on India's minimum float rule



Mumbai, Joe Leahy, June 10 2010: India is facing a growing private-sector backlash against a rule change that will lead to a flood of more than $50bn (£34bn) of new shares being listed over three years. 

There are concerns that the move could damage the country's stock market and hamper economic growth. 

The Finance Ministry has ordered companies to raise the portion of their shares that are publicly held from the current 10 per cent to 25 per cent. 

This implies that total share issuance in India this year could reach nearly double the previous annual record of $17.7bn in 2007, analysts say. 

"The same amount of money will be chasing a greater number of stock offerings, so that could put pressure on the companies' valuations," Hari S. Bhartia, president of the Confederation of Indian Industry, said. 

He urged the government to put the rule on hold. 

The Sensex has fallen 4.9 per cent this year after rising 81 per cent in 2009, as higher interest rates and the deepening European debt crisis hit foreign fund inflows. 

But Pranab Mukherjee, finance minister, is continuing with a plan to sell shares in state-owned groups to help reduce India's fiscal deficit. 

Analysts believe the free float rule is mainly aimed at speeding up this divestment programme. Many state-owned companies have public floats well below 25 per cent. 

The rule has been praised by corporate governance advocates, who have long charged that a smaller public holding allows companies to manipulate their stock prices by trading small numbers of shares. 

Nilesh Jasani, analyst at Credit Suisse in Mumbai, said in a report that the rule was well intentioned but "without a rampant bull market supported by massive unprecedented inflows, the demand for funds cannot be met". 

He said the rule would force companies to sell $13bn of additional shares this year on top of $15bn already planned, plus a $4bn rights issue unveiled yesterday by State Bank of India. 

This would make a total of $32bn of issuance this year against a rolling 12-month average of $12bn over the past four. 

"If companies with genuine needs for funds cannot raise the money they need, the entire infrastructure investment theme could come under pressure with many secondary impacts on [economic] growth," Mr Jasani said. 

According to Bloomberg data, about one-sixth of the top 3,000 companies listed in India will have to issue shares under the rule, including Reliance Power, controlled by industrialist Anil Ambani, Wipro Technologies, the third-largest outsourcing company, and DLF, the biggest real estate company. 

The rule will fall heavily on about 29 state-owned groups, forcing them to issue shares worth Rs1,250bn (£18.3bn), Prithvi Haldea, chairman of Prime Database, said. 

Copyright The Financial Times Limited 2010.


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