Disclosure issues keep FPIs at bay from HAL, Bharat Dynamics IPOs

Registration with US SEC, or compliance with "Rule 144A" of Securities Act pose hurdles; both issuances barely make it with LIC support

Defence public sector undertakings Hindustan Aeronautics (HAL) and Bharat Dynamics (BDL) decision to withhold material information from public shareholders is the key reason for tepid demand for their shares, particularly from overseas investors.

Several institutional investors were left ineligible from investing in these companies as they fail to meet the disclosure norms. Several big-ticket foreign portfolio investors (FPIs) had to stay away from participating in these IPOs despite attractive prospects, say bankers.

Both the issuances failed to garner any applications from FPIs and barely scraped through with the support of state-owned institutional investors such as Life Insurance Corporation (LIC).

Any unlisted shares being issued to the US-based qualified institutional investors (QIBs) should either be registered with the US market regulator Securities and Exchange Commission (SEC) or will have to comply with the so-called “Rule 144A”of the Securities Act.

The rule allows non-US companies to sell unlisted shares to US-based institutions without registering with SEC. However, the law specifies some basic requirements including reporting standards that the companies have to meet in order to be eligible. In case of HAL and BDL, disclosures were not on par with the requirements of 144A.

“US investors were unable to participate in the IPO due to regulatory issues. Since US investors are the biggest clients for all the major FPIs, they decided not to participate in these IPOs. However, we expected strong demand from domestic institutions such as MFs would offset the tepid response from FPIs. It could not happen as MFs decided to adopt a wait and watch stance since the sector is very new for listed space,” said a banker.

Interestingly, FPIs will be able to trade in both HAL and BDL after these companies list on the stock exchanges as 144A applies only to unlisted companies. “The law applies to only those cases where a company has discretion to market the product to select institutional investors. Since the company becomes publicly traded post listing, the rules under 144A won’t apply,” said a lawyer.

Experts say the development is nothing unforeseen as the government had essentially structured the deal for non-US investors. Indian market regulator the Securities and Exchange Board of India (Sebi) gave several exemptions to both the companies in terms of disclosure of some sensitive data. HAL had mentioned the same in its offer document.

“As a result of national security related concerns, the Indian Defence Services and we have determined that certain material documents and information as secret and confidential such as board minutes and committee minutes, agreements we executed with our suppliers, segment wise reporting, demand and supply forecasts,” said HAL in its offer document.