More follow-on required

Sebi's moves on FPO must be extended

Given how they’ve followed the prime minister’s statements on an increased disinvestment target, it is obvious the timing of Securities and Exchange Board of India’s (Sebi’s) moves on follow-on public offers (FPOs) is related to that — needless to say, the policy applies to all companies, not just government-owned ones. What this means is that, when the government chooses to divest part of its shareholding in selected public sector units, instead of relying on just the market price to figure out what the divestment price should be, it can go in for an auction to get the real price. So, if, for instance, PSU A’s market price is Rs 200 a share, the government can get big investors to bid for the share (as is done in the case of IPOs) and then allot them to the highest bidder. That way, the government gets the highest possible price for its shares — the allotment is done top-down, in the sense the highest bidder gets all she has bid for, after which the next bidder’s bid is dealt with — and retail investors are unaffected since they will get the 30 per cent that is reserved for them at the lowest possible price band which, in most cases, will be a price near about the market price of the share. Since large financial institutions typically don’t get the amounts they want in case an auction is oversubscribed — everyone then gets it on a pro-rata basis — the move allows them to bid aggressively. It also ensures the divestment process will now be able to attract a larger chunk of foreign investment.

That said, it is not automatically true that companies will now prefer the FPO route instead of the Qualified Institutional Placement (QIP) sales to Qualified Institutional Buyers (QIBs). The reason is simple: FPOs have the same cumbersome process that rights and other issues have of getting the offer document vetted, a process that can take anywhere between two weeks and six months — often a long enough period for the market fundamentals to undergo a complete U-turn. This is where Sebi needs to make some more changes so that the FPO process becomes faster. If a firm is a listed one, as they have to be to make an FPO, it is in any case making disclosures to stock exchanges on a 24x7 basis — so why not just allow an FPO process to get underway with the same speed as a QIP is allowed, with an abbreviated offer document? Indeed, the same applies, with even more force, to rights issues. Since rights issues are made only to a company’s existing set of investors, to whom all annual reports and statements are sent on a regular basis, why not make the process of issuing rights’ shares faster? Indeed, Sebi would do well to look at applying its new standards on FPOs to IPOs as well. Today, companies going in for IPOs clearly have no idea of what the market price is, so they simply rely on the judgment of the merchant banker who fixes a 20 per cent price band in which all bids are made — once all bids are in, the banker decides on a price and then makes a pro-rata allotment to all bidders. If, however, investors are allowed to bid above a certain floor price fixed by the merchant banker, the company can discover the real price (which could be double the merchant banker-set floor) and those investing can be confident of getting the full amount they’re interested in. Given Sebi’s raft of other moves on Monday, on greater disclosure to shareholders among others, it is likely these will follow on.