MUMBAI: Indian promoters will have to sell shares worth nearly Rs 4 lakh crore after the government proposed to increase the minimum public shareholding in listed firms to 35% from 25%.The proposal caught the markets offguard and led to a sharp selloff. The Sensex and Nifty fell 1% each as investors realised the promoters of companies such as Tata Consultancy Services, HDFC Life and Avenue Supermarts would soon have to cut holdings. The local arms of MNCs would also be affected as the parents would prefer to delist them than reduce holdings. The FM did not, however, disclose the timeline for the plan.Brokers said the move is aimed at developing the local stock market, which is currently constrained by the limited supply of shares of quality companies.“The increase in public shareholding from 25% to 35% will deepen capital markets, which will help in better price discovery,” said Nirmal Jain, chairman of the IIFL Group.Promoters currently cannot own more than 75% in listed companies. Once the budget proposal becomes law, promoters of nearly 1,400 listed companies — including TCS, Wipro , HDFC Life, Avenue Supermarts, Dabur, Bandhan Bank and Pidilite Industries — will have to offload their shares in the market.The twin moves to expand free float and raise foreign shareholding limits to the maximum permissible sectoral caps are expected to improve India’s weightage on the MSCI indices.“The increase in free float will definitely enhance India’s weightage in global indices such as MSCI and FTSE, once implemented smoothly,” said Bharat Iyer, head of equities at JPMorgan India. A higher weightage on an MSCI index leads to more inflows as foreign investors benchmark their portfolios to these indices. Five of the Nifty 50 companies — Wipro, TCS, Coal India, Hindustan Unilever (HUL) and Bharti Airtel — have promoter holdings of more than 65%.In HUL, Unilever’s stake is expected to decline to 61.9% from 67.2% following the merger with GlaxoSmithKline Consumer. TCS alone will flood the market with shares worth Rs 60,000 crore when the promoters reduce their stake from the current 72.05%.Of the BSE 500 companies, 100 firms have promoter stakes of over 65%.Experts though are worried the market may not have enough depth to soak up the flood of shares.“If public shareholding is increased, it will massively raise the supply of paper in the markets, and not all of it will be easily taken up,” said Shiv Diwan, cohead (institutional equities), Edelweiss Securities. “Some quality companies may find it easier, but there will still be a bit of an overhang.”Karvy Stock Broking CEO Rajiv Singh said the additional supply of equity should keep a lid on share valuations.The proposal could worry MNCs the most as foreign parents may opt to delist Indian arms.“Increase in public shareholding potential negative for MNCs and many MNCs listed on Indian bourses may consider delisting, if increase in public shareholding implemented,” Yes Securities president Amar Ambani said in a note. The change in public shareholding norms could transform the composition of key indices, as their weightage is based on the free float methodology. An increase in public shareholding is beneficial for minority investors. “Increase in public shareholding to 35% takes away the ability (of promoters) to unilaterally manage companies and pass special resolutions,” said Moin Ladha, partner at law firm Khaitan & Co. “This will enable public shareholders to have a say.”