The finance ministry’s discussion paper on raising the minimum public holding to be eligible for continuous listing from 10 per cent to 25 per cent is meeting stiff resistance from corporate India. Industry chambers are still noncommittal on their stance. But as the 28 February deadline for suggestions and comments nears, the trepidation over the proposals is giving sleepless nights to promoters who will be forced to offload chunks of their personal holdings.

The paper proposes a host of changes in the Securities Contracts Rules that haven’t gone down well with the promoters. For instance, it proposes that if the public holding goes below 25 per cent under any circumstances, “the promoters, management and the company may be jointly and severally liable to bring the public holding to 25 per cent within three months…, failing which appropriate enforcement action, including delisting, may be taken”. The paper also proposes defining the term ‘public holding’ and suggests excluding financial institutions, foreign institutional investors, employees, non-resident Indian/ overseas corporate bodies’ holdings and private corporate bodies from the definition. Essentially, this means that promoters holding 80-90 per cent of their stock will have to pare their share substantially.

When they submit their suggestions to the paper by 28 February, corporates are likely to target these specific clauses to be watered down rather than oppose the move directly. Such opposition, however, should not deter the government from the noble move. Over the years, regulations have selectively marginalised the retail investor, apparently, to protect the gullible from the vagaries of the market. Most of these changes happened after the meltdown of 1999-2000, when retail investors scorched their fingers and began to shy away from the market. As of 30 June 2007, the average retail holding in NSE companies is just 13 per cent. Institutional investors convinced the regulators that retail investors are better off in mutual funds. Gradually, retail quota in an IPO has gone down to as low as 25 per cent today while qualified institutional buyers (QIBs) have a quota of 60 per cent. Pre-1993, a public issue had to be a minimum of 60 per cent of a company’s issued capital.

Though vested interests would point towards the carnage in the stockmarkets to keep retail holdings minimal, widespread holding is essential for stability in the marketplace. A higher float reduces chances of manipulation given that promoters with low public float manipulate share prices through myriad investment companies. IPOs in recent times in China and India have proved that retail investors have an appetite for new stocks. Restricting their participation is against the principles of a free market. In November 2007, PetroChina sold 4 billion shares, or 2 per cent of its stocks, in an IPO to raise $8.9 billion, giving it a valuation of $1 trillion, twice that of the world’s largest oil and gas company Exxon-Mobil. And last month, Reliance Power received 5 million applications for its $2.5-billion IPO, including bids worth $190 billion—both world records. Clearly, retail investors haven’t asked for mother-hens to protect them in the stockmarkets. They are aware of the risks. Even though the Reliance Power stock listed disastrously below the issue price and Anil now has the distinction of being the first Ambani ever to cause losses to shareholders, but most certainly the junior Ambani will have to face the same investors yet again in the upcoming Reliance Infratel issue.

That mutual funds is the only way for retail investors to participate in the stockmarkets is an argument that’s been turned on its head by such public response. Western markets have turned to mutual funds as much because of lack of public interest as it is to protect small investors. But reducing the role of the retail investor here has been equivalent to treating the symptom, rather than the disease. Remember, retail investors clam up either in a meltdown, or, when volatility is unbearable. But, isn’t that true for all investors and investments in such situations? So, why single out retail investors? It’s better to invest money in educating investors about the mercurial nature of equity investing than bottleneck their participation.

The discussion paper has come at just the right time when the markets are swinging uncontrollably. And wider holdings promise to bring sanity. With such retail interest, why must the domestic stockmarkets follow the mutual fund model? If countries such as India and China have such unique retail markets, let them be so.