The idea of a minimum level of public shareholding in listed companies is not new. Until the early 1990s, promoters of listed companies were not allowed to hold more than 40% of the paid-up capital. This was relaxed to allow up to 90% promoter holding. The latest amendment requires a minimum public float of 25% in listed companies, irrespective of what requirements applied to them at the time of their initial listing. Listed companies where promoter holding exceeds 75% have to sell down to the public, diluting 5% per year until the stipulated minimum public float of 25% is achieved.

At a conceptual level, such a requirement is laudable. Among the long-term advantages of a higher public float are increased market depth, enhanced liquidity, better price discovery, and improvement in corporate governance. When companies sell down to meet the enhanced minimum public float, it should result in a more dispersed shareholding, lowering opportunities for collusive market action. The resultant increase in liquidity would enable small investors to buy or sell shares at prices that are discovered in a fair manner. Reduced ownership concentration also encourages good governance.

At a more pragmatic level too, there would be significant long-term benefits. A higher public holding would increase the free float market capitalization of the Indian market. As a result, India’s weightage in the globally tracked free-float-based emerging market indices would increase. This, in turn, should lead to a rise in the quantum of foreign inflows allocated to India. Many global funds mirror the index weightages while deciding on their country allocations. With India’s free float market capitalization increasing, the India allocations of several FIIs would go up.

With higher public float in large entities such as MMTC and NMDC, the composition of the Indian/regional market indices could undergo a change. One of the eligibility conditions for a stock to be included into the Nifty (or the MSCI) is that it should have a minimum free float of 10%. Higher public float would not only raise the free-float-based market capitalization of the indices themselves, but would also make them more representative through the inclusion of new stocks.

Government-owned companies would account for bulk of the issuances to comply with the new minimum public float norm. If the government chooses to bring down its shareholding in 29 listed companies where it owns over 75% through stake sale, it could raise more than Rs 120,000 crore over the next five years. This would help the government to consolidate its fiscal position further after raising over Rs 100,000 crore from the auctions of 3G and BWA spectrum. Stake sale in MMTC (government holding: 99.3%), NMDC (government holding: 90%) and NTPC (government holding: 84.5%) alone would help raise over Rs 70,000 crore.

However, the requirement of higher public float is not trouble-free. There would be a glut of issuances to meet the new guidelines. In the near term, the incremental equity issuance is likely to create an overhang in the secondary market. To comply with the new norm, companies would have to raise over Rs 150,000 crore. This is three times the average of Rs 50,000 crore raised annually through equity issues including IPOs. Not only will companies/promoters seeking to comply with the new guidelines find it difficult to do so, companies with genuine need for capital too might find it difficult to raise resources.

Given the ongoing global financial crisis, this is not the best time to have introduced this norm. It might have been more sensible to wait for the global crisis to subside for good. But then, there always are some not-so-desirable fallouts and some pain associated with any change. Promoters do not need to bring down their holdings at one go. Staggered dilution would help take away some of the pain, though the valuations realized may still not be in line with promoters’ expectations. The guideline of 5% dilution per year gives most companies three years and some government-owned companies five years to comply. If this were revised to 2-3% dilution per year, it could make things easier.

Another fallout might be that some companies with low public float would choose to buy back the small portion of shares in public hands and go private. However, in my view, there would be very few such instances. If some companies do choose to go private because a larger public float exposes them to greater public scrutiny, shareholders are better-off not owning shares in such companies. The Indian capital markets have come of age. A listing on Indian bourses is not just about raising money but perhaps more significantly for enhancing brand value – the recent ADR issue of Standard Chartered Bank is a case in point.

The exact gravity of the European debt crisis is difficult to understand by an ordinary person sitting in India. However, when an expert like Nassim Taleb has to say something in this regard, one should sit up and take notice. This is what he had to say to CNBC Europe yesterday

The economic situation today is drastically worse than a couple years ago, and the Euro is doomed as a concept

"We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base.

Banks balance sheets are just as bad as they were two years ago when the crisis began and "the quality of the risks hasn't improved

The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer,"

The world needs to prepare itself for austerity. We need to slash debt.Unfortunately, that's the only solution.

Obama administration's efforts to pull the US out of recession haven't succeeded.It's not that they make mistakes; it's that they almost get nothing right. Moreover, a second major stimulus package may be futile

Obama promised us 8 percent unemployment through stimulus. It hasn't worked. There are significantly more liabilities in the US than in other countries around the world.Don't give a junkie more drugs, don't give a debt junkie more debt."

The key message from the above is that according to Taleb, who is now signaling that public attention has shifted to debt, instead of growth. This implies that even if growth comes on the back of high debt, capital markets around the world may not respond accordingly and may refuse to go up in a sustained manner. The other implication is that Inflation will hit the world hard if something is not done to slash the amount of money circulating around in the world.

For India, if the world slows sure there would some slowdown here too . How much? Only time will tell. We can predict only the earnings growth. Pre expansion or contraction is a function of the market not under our control and depending on risk , capital flows , perception etc. One lesson, which the Lehman crisis has taught me is that one should not ignore any possibility no matter how low the probability of that event happening might be . Further we all know that Murphy’s Law does hold some truth in “Whatever can go wrong will go wrong”

Inflation is a worry in India, we all know that . Apart from primary inflation even the non food inflation is not coming down. If Kirit Parekh’s recommendations are incorporated , it would only make matters worse on inflation

All these factors warrant some caution in the short term . I would look to lighten trading positions for the least . I remain extremely positive about the long term and one should not panic if he is a long term investor . For, the short term nonetheless, there may be some pain.

To my mind, European situation is not that precarious as it was in the US during the Lehman crisis. I know that there would be many economists who would vehemently disagree with this but I think US. Relevance of EU to world GDP growth, cross country trade and as a reserve currency is far lesser than that of the US. When there was question mark over US economic growth, the world panicked. However, the same situation may not happen when some European countries (PIIGS) default.

There could be a possible scenarios coming out of this. The trillion dollar rescue package for PIIGS comes with certain conditions to improve the fiscal situation. These countries will have to raise taxes, cut expenditure and go for a prolonged period of fiscal consolidation. If that were to happen, world might see low growth, benign interest rates and subdued commodity prices for a long time. This can also lead to reiteration of importance of the US. Capital is expected to flow back to enabling US treasuries and dollar to appreciate. Improved capital flows will lead to better reserve situation and stronger currency. Till some time back, there was apprehension as to how US will fund its growing fiscal deficit as the ability of the rest of the world to buy US treasuries was falling. That situation has suddenly got completely reversed.

For the world equity markets, one form of leverage might get replaced by another form. The dollar carry trade shall get replaced by Pound and Euro carry trade. In between, huge volatility is expected in the market.

The implication for India are that subdued commodity prices might result in earnings downgrade of some large cap index companies. However, as US becomes stronger and the contagion effect of EU is restricted, India might emerge as the favoured destination

In these circumstances, the following sectors could be winners ;

Financial Sector: Lower commodity prices, higher tax collections, PSU divestments and increased revenue from telecom industry shall result in lower than estimated fiscal deficit situation. Owing to low interest rates in most parts of the world, RBI too is expected to keep interest rates stable. These shall result in ample liquidity and stable interest rates in the domestic economy. Banks would therefore stand to gain from high credit growth and stable margin. The bond yields remaining low would add to treasury income. As domestic economy continues to grow, financial companies would emerge as the best play on India’s domestic consumption theme.Big banks like SBI or small banks like Dena Bank should outperperform

Auto: Market is cautious on the operating margin for auto sector this year. If commodity prices were to correct and stay subdued, auto companies may see earnings upgrades due to better than estimated margin assumption. Secondly, a normal monsoon, stable interest rates and liquidity in the banking system shall be beneficial for overall volume growth in tractors, two wheelers and passenger cars. We may therefore see earnings upgrades in auto sector and the sector shall out-perform.

Maruti should outperform the market. The margins can come under some sort of pressure as euro and pound sees some depreciation but higher volumes should keep profitability high

Cement: Twin concerns of Supply augmentation and drop in realizations is already factored in prices. What is positive for the industry is the higher demand. Cement demand in India has moved up from 8%-9% range to 11%-13% range. I expect demand to further accelerate due to increase infrastructure spending and private consumption on housing. Barring the monsoon period weakness, I don’t expect prices to correct further. My view is that cement companies will continue to make 25% EBITDA margin due to strong demand and drop in coking coal prices. At 12% demand growth, cement industry needs 60 mn tons of additional capacity by FY12. So, in our view the increased supply will be absorbed by the market without significant drop in realization. Cement has strong linkage with the domestic growth, valuation is reasonable and current sentiment is negative.

Shree cement can be big winner in these circumstances as apart from cement - in one years time additional 300MW of power capacity will come on stream and this would be on a merchant basis. Incremental EBIDTA could be as high as the current EBIDTA of the company (assuming a EBIDTA margin of Rs 3 per unit). It is one of the most profitable cement companies in India and available at very attractive valuations

In the back drop of the European crisis, I expect that world recovery will lose some momentum in 2010-11 but I do not anticipate that the recent turmoil in the markets will derail the global upswing. The implication for Asia is that the regional rebound will slow rather than stall and it remains likely that growth will stay far higher than elsewhere. Accordingly, Asian central banks will be focused on inflation. Policy rates will move up further and most countries will be nearing the end of their tightening cycles well before rate hikes even start in the US and in Europe. Finally,I would like to forecast that Asian currencies and stocks will end FY11 stronger and higher than where they finished in FY10.

In India, Q4FY10 has most certainly climbed following a weak Q3 which was caused by a slump in agriculture. In coming quarters, I expect that GDP will continue to climb at a 8-9% q-o-q annualized pace, even as fiscal stimulus measures are pulled back. There is very little spare capacity and corporate profitability is strong. Private investment should pick up while industrial output and consumer spending should be supported by ongoing infrastructure improvement projects, rapidly rising household incomes and increased bank lending

The Government is committed to cutting the budget deficit. The fiscal shortfall and the overall level of government debt at 82% of GDP remain quite high. Nonetheless, financing problems are unlikely. The prospects of continued high nominal GDP makes debt ratios manageable . The liabilities are also overwhelmingly owned by on-shore institutions. This means that India especially is not vulnerable to shifts in foreign investor sentiments . In addition ,the 3G license auction which generated almost double the target and the equivalent of around 0.5% of GDP, has also made the government borrowing programme less daunting .

I remain very firmly bullish. Bull markets works the best when doubted the most. With interest rates closer to zero and expected to remain so in the developed countries around the world for years, there is a limit to which equity markets can fall. Every correction should be used as a buying opportunity . Real estate stocks should surprise most analysts on the upside . Just wait and watch