Sebi's decision to ease OFS norms may help a number of small companies

The Securities and Exchange Board of India’s (Sebi’s) decision to ease offer for sale (OFS) norms is likely to help a number of small companies, including public sector firms.

The markets regulator, in its board meeting recently, had said it would expand the list of companies that can use the route to beyond the top 200 firms.

“The OFS mechanism will be available to shareholders of companies with market capitalisation of Rs 10 billion and above,” said the Sebi note.

This would mean that the route is now available to over 700 companies, according to an analysis of market capitalisation data from corporate-tracker Capitaline. 

The data looked at companies with a market capitalisation of more than Rs 10 billion as of November 30. 

This is an approximation of the regulatory guideline of average daily market capitalisation of the six months preceding the issue month, but provides a broad sense of how many more companies can use the route.

Public sector companies, in particular, may benefit. A quick, back-of-the envelope calculation shows that nearly two dozen public sector firms may be find it easier to raise the over Rs 160 billion that they require to meet the minimum public shareholding norms which cap promoter stake at 75 per cent. 

The use of this route by both the private and public sectors is likely to get a boost, according to experts. 

Pavan Kumar Vijay, founder and managing director at legal and financial consulting firm Corporate Professionals India, said that a simplified process will result in more action in the OFS space.

“There will be a boost to the use of this route. In my opinion, there will be more OFS issues than FPOs (follow-on public offerings),” he said.

An FPO is similar to an initial public offer (IPO), except that the shares are offered to the public by an already listed firm. It is used by promoters to raise capital or bring down their stake in the company. The fact that it takes longer than an OFS could result in the latter gaining popularity.

Prashant Sharma, chief investment officer at Aviva Life Insurance Company India, said the shorter term could see hiccups because of valuation issues, with a number of companies having corrected in the recent past. Smaller companies have been harder hit. 

However, the OFS route is likely to be the preferred once valuations improve, according to him. “It’s far more efficient from a timing perspective,” he said.