Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. News
  2. Explained

Why is Ruchi Soya Share Price Rise Forcing SEBI to Rethink Free Float Norms?

Aug 24, 2020 6:33 AM 3 min read
Editorial

We have often heard tales of stocks falling from grace - sometimes even nosediving as much as 85% intraday (think Yes Bank).

This time around, we have a tale of an underdog rising (kind of) to glory.

Share price of edible oil manufacturer Ruchi Soya shot up c. 8,764% after re-listing at ₹17 on January 27th - this year. While Ruchi Soya share price has halved since then, it nevertheless managed to catch the regulator’s eye.

For some background...Ruchi Soya was acquired by yoga guru Baba Ramdev’s Patanjali Ayurveda -led consortium last year via an insolvency resolution process.

So what propelled this colossal jump?

Well, the driver behind Ruchi Soya’s unprecedented jump is something referred to as ‘Free Float’.

 

 

What is Free Float?

Free float, also known as public float, is the number of a company's outstanding shares owned by public investors, excluding locked-in shares held by company managers and officers, controlling-interest investors, governments and other private parties.

Essentially, these refer to the number of shares available to the public for trading in the secondary market.

As on March 31st, promoters of Ruchi Soya held 99.03% of the company’s capital, limiting public shareholding to a negligible 0.97%.

The extreme movement in Ruchi Soya share price has prompted the Securities and Exchange Board of India (SEBI) to propose an increase in the minimum free float for companies relisting after undergoing the corporate insolvency resolution process (CIRP).

In a discussion paper issued this week, SEBI has sought the market's feedback on whether the threshold for minimum public shareholding (MPS) at the time of re-listing should be set at 5% or whether companies should be allowed to re-list with any float on the condition that they will increase it to 10% within six months.

Quick Fact: Currently, SEBI provides up to 18 months for companies listing under the CIRP to hike their MPS to 10% and another 18 months to raise it to 25%.

At present, companies that get listed following their initial public offer (IPO) need to have at least 10% public shareholding, which needs to be increased to 25% within three years.

However, companies re-listing after undergoing the insolvency resolution process do not have any such minimum free float percentage requirement to begin with. 

 

Why the Fuss About Free Float?

Free float is considered to be a very important component of the price discovery process - the process of determining the price of an asset, security, commodity, or currency through the interactions of buyers and sellers - as it provides a more accurate representation of the company’s worth as per public investors.

It also gives an insight into the company's stock volatility. More often than not, stocks with a smaller free float (thereby limited liquidity and a wider bid-ask spread) tend to be more volatile in comparison to companies with larger free floats. This is because in case of a major event, there are only a limited number of shares that can be bought or sold, which can sway the stock price greatly. This becomes all the more pronounced when investors resort to panic selling.

A high free float also ensures better liquidity and is likely to attract higher institutional participation, as this enables them to trade a substantial number of shares without making a heavy impact on the company’s share price. It also aids in attracting more foreign funds.

 

Bottom Line

As per industry data, key Indian equity markets have comparably lower levels of free-float stocks than their global counterparts, since they have been dominated by family-run businesses where the promoters are often unwilling to cede control and dilute their holding beyond a point.

 

The process of ceding ownership will not be an easy one, but will be beneficial nevertheless. And as opined by NSE's Chief Executive and MD Vikram Limaye, "The long-term positive implications of higher free-float in terms of wider ownership, greater market depth and better governance standards significantly outweigh the near-term headwinds."

FIN.

There's so much happening around that simply keeping up can be a task! How about more such fun Quizzes to help you retain? Subscribe to our Quiz Knock Newsletter to receive them straight to your inbox.