The Hindenburg Report on Adani—A Case to Revisit Minimum Public Shareholding Requirements

On 24 January 2023, a forensic financial research group by the name of Hindenburg Research released a report based on two years of investigation into the workings of the Adani group, a large Indian ports to edible oils conglomerate. This report makes a number of allegations of accounting fraud and share price manipulation.

One of the allegations levied on the Adani group involves their public shareholding being dangerously close to the minimum levels required. In order to understand this allegation and what it may mean for the Adani group and the entire Indian securities market, it may be helpful to analyze the evolution of the minimum public shareholding requirement in India.

Evolution of the Minimum Public Shareholding Requirement

Prior to 2010, the Indian Securities Contracts Regulations Rules required all listed companies to maintain at least 10% of their post-issue paid-up share capital in public hands. In 2010, the Securities and Exchange Board of India (‘SEBI’) increased this to 25%. Companies were given a maximum of three years to comply with this requirement. Additionally, there was an exception for large companies having a post-issue capital in excess of INR 40 billion. Such companies would be permitted to list 10% of their shares with a requirement to increase their public shareholding to 25% in the three years following the listing.

The next major amendment took place in 2014 which pegged the minimum public shareholding to the post-issue share capital as follows:

1. For companies having a post-issue capital of less than INR 16 billion – 25%;
2. For companies having a post-issue capital between INR 16 billion and INR 40 billion – such number of shares that would amount to INR 4 billion at the offer price;

3. For companies having a post-issue capital in excess of INR 40 billion – 10%.

Any company listed with less than 25% would be required to gradually increase its public shareholding to 25% within a period of three years, in accordance with the 2010 amendment. In 2021 the public shareholding requirement was reduced to 5% for companies having a post-issue share capital in excess of INR 10 trillion in light of the listing of the Indian insurance behemoth, the Life Insurance Corporation of India.

Thus, the present position on minimum public shareholding incorporates a graded approach, based on company size. In addition, all listed companies must gradually increase their minimum public shareholding until they achieve the 25% mark.

Rationale of the 25% public shareholding requirement

Indian law requires that certain shareholder decisions that are of vital importance to companies be taken only if they receive the support of at least 75% of the votes cast at a shareholders’ meeting, otherwise known as a special resolution. Special resolutions are required for further issue of capital and changes in the name, registered address and in the constitutional documents of the company, amongst others. Ostensibly, the rationale behind requiring a minimum of 25% of the post-issue capital in public hands is to ensure that there is some support for special resolutions outside of the controlling shareholder (referred to in India as a ‘promoter’). However, as the Hindenburg report suggests, there are workarounds to ensure that even if the minimum public shareholding requirement is met, promoters may still be able to pass a special resolution without public support.

Allegations in the Hindenburg Report

One of the many allegations in the Hindenburg report suggests that there is considerable opacity in certain public shareholders of Adani companies, particularly funds based in Mauritius. The report suggests that these funds, while shown as representing public shareholding, are actually owned and controlled by the Adani group and, therefore, ought to be classified as promoter shareholders as opposed to public shareholders. They suggest that by using such funds, which have the entirety of their assets invested in Adani companies, Adani promoters are able to manipulate share prices as well as retain a controlling stake in excess of 75% in their companies. This is financially viable only if the promoter's shareholding in such listed companies is close to 75%.

In its response dated 29 January 2023, the Adani group has categorically denied any connection with the offshore funds alluded to in the Hindenburg report, specifically stating that, as publicly listed companies, they have no control over who buys, sells or otherwise owns their publicly traded shares.

However, our initial research suggests that it is not unusual to see listed companies having close to 75% shareholding held by promoters.

An Analysis of Promoter Shareholdings in the NIFTY 500

Based on publicly available data, we analyzed the top 500 companies on the National Stock Exchange (‘NSE’) by market capitalization, seeking to understand the shareholding breakup by promoter and non-promoter groups.

While the average promoter shareholding in Indian companies is around the 50% mark, 97 out of the top 500 listed companies on the NSE have a promoter shareholding between 70% and 75%. This high level of promoter shareholding, as brought to light in the Hindenburg report, clearly extends beyond the Adani conglomerate.

While a promoter shareholding between 70% and 75% is entirely within SEBI requirements, it is theoretically possible that nearly one-fifth of companies listed on the NSE are susceptible to excess promoter control through promoter-owned public shareholders.

The Case for 35%

In her maiden Budget Speech in 2019, India’s current Finance Minister had suggested increasing the minimum public shareholding requirement from 25% to 35%. This change would have the dual effect of increasing liquidity in Indian capital markets as well as making it more difficult for promoters to exert excessive influence over listed companies. Indian promoters would find it more difficult to hold in excess of 10% through public shareholders as compared to the 2-3% alleged by Hindenburg. However, SEBI itself was not in favor of this move. Other experts suggested that Indian markets may not be able to absorb the increase in public float, eventually defeating the purpose of better price discovery.

However, if the allegations in the Hindenburg report, specifically those relating to high promoter shareholding and connected offshore funds are found to be true, this may create an opportunity for Indian lawmakers to reconsider an increase in the public shareholding requirements from 25% to 35%. Liquidity concerns may be offset by the burgeoning participation of retail investors, both directly as well as through mutual funds. At the same time, a gradual increase in public shareholding as seen between 2010 and 2014 would eventually lead to better transparency and accountability in Indian listed companies, thus driving more participation of retail foreign portfolio investors.

Arjya B. Majumdar is Professor and Dean, Centre for Global Corporate and Financial Law and Policy, O. P. Jindal Global University.

Yash Gupta is a law student at O. P. Jindal Global University.