Assessing market impact of forced promoter stake dilution

Abstract

The Union Budget, on 4 July 2019 announced a proposal to increase Minimum Public Shareholding (MPS) requirement for companies, from 25% to 35%. Our objective was to ascertain whether the announcement was viewed as a significant event by markets. Moreover, we sought to isolate this announcement effect to individual industries to ascertain whether the public shareholders in different industries react differently to the announcement. In pursuit of the same, initially, we studied existing literature and theory on the impact of promoter stakes in firm value and performance. In addition, we analyzed the trend of regulation around promoter holdings, the regulatory implementation, and compliance. Moreover, we statistically compare companies with different levels of public shareholdings to try and identify a significant trend. Next, we sought to create the sample of affected companies, from the proposed change in rule. For the same, we drew data for companies with public shareholding in the range of 25 to 35 percentage, as these represented companies directly impacted by change in regulation. We used CMIE’s ProwessIQ database and Bloomberg Market Data for the same. For each of these companies, we computed performance over a 1 week and 1 month period, defined as excess returns (Jensen’s Alpha). Further, for each industry, we computed average excess returns, on an equal weighted and a market capitalization (value) weighted basis, and thus, tested hypotheses on whether the public shareholders reacted significantly to the announcement. Our findings are summarized in the report