Companies planning to raise funds through IPO will soon have to ensure that 25% of their total equity lies with public. The notification amending the relevant clauses of the Securities Contract Regultion, 1957, is expected soon and the norms may come into force after an approval from the law ministry.

Under the current rules, companies have the option to go public with 10% or 25% equity dilution. If the company goes for 10% dilution, then the issue size has to be minimum Rs 100 crore, provided they issue 20 lakh securities. The government is scrapping the rules allowing companies to go for IPO with 10% dilution.

The government had made clear its intention to make a minimum 25% public float compulsory during the last Union Budget. The notification is intended to operationalise the budget announcement. The move by the Government is in line with its mission to ensure that investors get a wider selection of stocks to choose from (create HUGE volumes?).

Under the proposed plan, already listed companies will be required to divest at least 5% stake every year from 2010 to reach the prescribed threshold.

The change in norm could affect the over 300 companies where promoters hold more than 75%, as they would now be forced to dilute their stakes in a phased manner to the public.

The government estimates that there could be equity issuances worth nearly Rs 1.5 lakh crore if companies were to dilute their stakes to comply with the new stipulation.

Source ET