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No exceptions please

The view that public sector enterprises should be exempted from the 25 per cent public shareholding norm deserves to be ignored

The capital markets regulator is serious about ensuring that all listed companies have no more than 75 per cent of their stock in promoters' hands. This is a good idea and should always have been implemented rigorously. There is nothing worse for shareholders than to be holding stock in a company where the promoter controls 80-90 per cent or more of the stock. You are essentially a minority shareholder in a private company-a situation that combines the worst of both worlds.

There are two specific problems in such a situation. One, corporate governance issues tend to abound since the promoter can have his own way with everything. In theory shareholders can exit but that brings us to the second problem, which is that both liquidity and valuation tend to be poor. If the stock is not a large-cap or at least a mid-cap then there are few buyers and the impact cost of trying to sell is high.

However, the most interesting part of the discussion on this limit is what should be done with Public Sector Enterprises. There is an opinion within the government that the rule should either be shelved or softened for PSEs. The reason is that hitting the 25 per cent public holding on SEBI's deadline will become an external factor driving the disinvestment programme. The government would obviously like to run the disinvestment plan on a separate plan for its own goals.

This is fine, except that it is amusing to note that the logic of having 25 per cent public stake actually applies more to PSEs than to other companies. If there is one promoter which habitually rides rough-shod over the rights of minority shareholders, it is the government. Here's a promoter which mostly doesn't care about shareholder value because it derives other out-of-band benefits from the companies. Here's a promoter which blatantly finances its other activities by bleeding some of its listed companies. Here's a promoter whose family members (meaning politicians and bureaucrats) don't think twice about using company facilities for their private ends. And this is the promoter that wants to be an exception to a measure designed to improve corporate governance. Just this morning when I'm writing this comes the news that the government is pressurising the regulator to clear the Coal India IPO before the new norms come into play.

Of course, as share investors, you know that in practice this is irrelevant. If a PSE is poorly governed at 5 per cent floating stock, then it's going to be just as poorly governed at 26 per cent, or for that matter at 49.99 per cent. It's hard to imagine a scenario in which minority shareholders-no matter how large their holdings-can create pressure that would make a PSE change its ways.

This is also the reason why I have always been so negative on PSE disinvestment. It has no relevance except as a way for the government to sell off some family silver to fund its profligate ways. Witness the news that the government will need the little matter of an extra Rs 50,000 crore or so to keep its home fires burning during the current fiscal. This, despite the 3G bonanza.

Since the government is clear about its intention of retaining control, there's nothing of interest in PSEs for investors who like to identify and buy good companies to buy into and hold.