The minimum public shareholding or MPS rule for the listed private companies has been changed with the amended Securities Contracts Regulation Rules in the year 2010. The rules insisted on the compulsory minimum public shareholding or public float of 25% which is now being mulled to be raised to 30% or eve to 35% by the market watchdog. Earlier a three years timeframe was given to conform to the mandated minimum public shareholding rule.
In simple terms, the rule calls for a minimum shareholding of 25% by non-promoters or public in publicly listed companies.
And as quoted in one of the leading business dailies report, the new proposal for its increase shall not result in any likely hurdles "Thus far, most private sector firms have complied with the SEBI requirement for a 25 percent public float and raising it to 30 per cent or even 35 percent should not pose a major challenge to most."
Likewise, public sector undertakings have also been now the part of this minimum shareholding rule and have been allowed a time till August 2018 to comply with 25% requirement.
Importance of MSP for you as an investor
1. MPS rule restricts promoters say in corporate actions: Like as in the recent deal where Reliance Jio Infocomm will buy out telecom assets of RCom, SEBI as well as investors view call with the promoters largely. This has been welcomed by the debt-ridden company to maintain its share price in addition to other grounds. In line with it SEBI last week allowed two more methods of share sale to comply with the MPS rule.
2. High liquidity and lower probability of price manipulation in the publicly listed scrip: With more of public float and hence more supply of shares, the trading in shares of such scrips with better liquidity shall be made easy with lesser chances of price manipulation. With it depth of the markets which is largely promoter driven will be enhanced.
3. Better Price Discovery and lower impact cost on bulk trading: The enhancement of MSP rule will better the prospect of trading in shares which currently offer thin trading and also improve cost for the investor which is substantial in case of buying or selling in bulk.
Penalty on non-compliance with the MPS rule
SEBI in October last year asked exchanges to act hard on such companies not complying with the minimum shareholding by public of 25% with a penalty of Rs. 5000 per day and freezing shares of the promoters in such companies. Also the promoters are to barred from any position as a director in case their companies do not comply with the 25% MPS rule and can in a worst scenario be delisted.