Sebi suggests ITP platform for strategic stake sale

Useful for price discovery during strategic disinvestment; Union Budget set Rs 28,500 crore as strategic sale target

The Securities and Exchange Board of India (Sebi) has suggested the newly introduced institutional trading platform (ITP) be used by the central government for its disinvestment programme in unlisted public sector undertakings (PSUs), sources have said.

“Currently, there is no real way for actual price discovery of unlisted companies. Therefore, the ITP platform can be used for divesting stake in these,” said a source.

Introduced in 2013, the ITP is a mechanism for listing of companies without an initial public offering (IPO) or fund raising.

REGULATOR IN ACTION

• Through the platform, stake in unlisted companies can be picked up by strategic investors such as private equities and venture capitals

For OFS

• The market regulator did not reduce notice period to one day, as volatility in some cases had been higher on T-1 notice
• Range of fall has been up to 5% when notice period was 2 days
• Sebi, however, allowed notice day to be a Saturday as well

The Budget this year had set an ambitious target for divestment at Rs 41,000 crore and strategic sales at Rs 28,500 crore.

Sebi says the ITP platform could be used by strategic investors such as private equity or venture capital funds to take stake in unlisted companies. The Centre has been seeking help from Sebi in removing irritants in the share sale process. The department of disinvestment had asked Sebi to allow suspension in trading in a company on the day of its Offer for Sale (OFS), the mechanism used to divest promoter holding. It had also asked Sebi to relax the two-day notice period to an exchange for an OFS.

These proposals were aimed to reduce volatility and a downward pressure on share prices. Sebi is yet to approve the requests. An analysis by it has apparently shown little correlation between share price volatility and an OFS announcement.

In the past, Sebi has experimented with a one-day notice period. According to the analysis, after August 2014, when the notice period had been two days (T-2) the prices of PSUs in which OFS was conducted were in a  range of 0.5 per cent and 4.4 per cent. Between May 2013 and August 2014, when the notice period was one day, a price drop of as much as 11 per cent was seen.

 

According to Sebi, some price correction in PSUs is inevitable during divestment.“Disinvestment through OFS results in significant increase in PSUs' floating stock. Some correction in the price is natural when the floating stock increases by such large numbers,” the regulator stated in a board meeting note. Some PSUs have little free-float and, hence, the increase in floating stock was substantial. For instance, in Steel Authority of India, the float increased by 40 per cent after its latest disinvesment. In Coal India, the rise was almost 100 per cent.

 

“The final correction in price depends on the market appetite and the overall size of the OFS vis-à-vis floating stock,” the regulator concluded.

Another proposal to the regulator was to hold an OFS on Saturday. Sebi didn't agree, saying it would only postpone the volatility. What it did accept was that the government could make public an OFS plan on Saturday, a market holiday, and conduct the share sale on Monday.