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Should Sebi have allowed IPPs to meet disinvestment targets?

Business Standard  |  New Delhi 

The mechanism excludes retail investors from the process, but it will help companies meet listing norms.

Strategist & Head of Research, SMC Global Securities Limited

"It might not be possible to achieve the wide distribution of PSU shares among retail investors under this mechanism"

The history of the Indian initial public offer (IPO) market suggests that there is a sense of confidence among Indian investors towards public sector undertaking (PSU) public issues in terms of their ability to provide positive returns. The general sense is that PSU public issues are reasonably priced in comparison to their private sector peers. This has made several investors aggressively invest in PSU public issues. Also, these issues could attract “new” investors to the market, resulting in new demat accounts being opened. Big IPOs such as ONGC and Coal India successfully added thousands of demat accounts.

Against this backdrop, on January 3, 2012, the Securities and Exchange Board of India (Sebi) came out with a new set of guidelines in connection with an altogether different requirement of ensuring smooth compliance of “minimum public shareholding” norms, according to the listing agreement. These guidelines can have a significant influence on the future course of action in share sale by PSUs.

Under these guidelines, Sebi has allowed two new methods for promoter stakes to be diluted. The first, institutional placement programme (IPP), can be made only to qualified institutional buyers or QIBs. This is more or less similar to a qualified institutional placement or QIP. The only difference is that in the case of QIP, shares are issued by the company and that enables the company to raise fresh funding, whereas the IPP will enable promoters to sell their shares to bring down their stake and the sale proceeds will go to promoters personally. The second method, under “offer for sale through separate window in stock exchanges”, can help promoters offload their stakes without going through the complex procedure of “bulk and block deals”.

Sebi has suggested that these two routes will be used by companies for the purposes of reducing the promoters’ stakes in the context of “minimum public shareholding”. But the “offer for sale” can also be used by the top 100 companies by market capitalisation even when they have already complied with the minimum public shareholding norms. This is a very critical provision for the government to meet its disinvestment targets; it will surely help control the fiscal deficit. In the top 100 companies by market cap, there are about 27 PSUs such as ONGC, Coal India, NTPC, SBI, NMDC, IOC, BHEL and so on. The government can take advantage of the “offer for sale through separate window” to come out with “quick paced” disinvestment, instead of going through follow-on public offers ( FPOs).

One key concern is what happens to retail investors? Since the bidders in such a window will be institutions, retail investors may end up missing the action.

Considering the current precarious fiscal deficit situation, one can understand that the fiscal deficit management is probably its top priority. But history shows that even one good IPO can change the entire mood and raise market confidence. In June 2003, the response to the Maruti Udyog IPO was overwhelming. The issue was subscribed over nine times and it mopped up an unprecedented Rs 8,000 crore. Maruti’s IPO also triggered the resurgence of the primary market, which had been in the doldrums since the mid-1990s.

Once the fiscal deficit demands are met, one can hope that the government will structure some new concept to ensure due relevance for retail investors in the PSU disinvestment process.

This fact was even officially acknowledged by the government through its disinvestment policy. According to the salient features of the government’s disinvestment policy, listed on the website of the department of disinvestment, citizens have every right to own part of the shares of PSUs, which are the wealth of the nation, and this wealth should rest in the hands of the people.

Founder, Kejriwal Research and Investment Services

“This will be a method that is time-saving, cost-effective and compliant, and will not disrupt price in the secondary markets”

One of the first capital market measures announced by Finance Minister Pranab Mukherjee was that promoter holdings in listed firms should be brought down to 75 per cent or less. Being a contentious issue, it appeared that, once again, it would remain a wish or at best an “intent”. The current state of the markets has forced a major rethink on the issue. We all remember the condition of the follow-on public offering (FPO) of REC for which LIC, the largest insurance company, was used to bail out the issue. This was not the first or only instance of this kind of bail-out either.

The budget for 2011-12 took credit for divestment proceeds of Rs 40,000 crore, of which a mere Rs 1,145 crore has been raised. Given this situation, the new guidelines stipulated by the Securities and Exchange Board of India (Sebi) for bringing down promoter shareholding or increasing public shareholding is laudable.

The institutional placement programme (IPP) stipulates that the exercise can only be done to reduce the holding either by way of fresh issue or offer for sale. The regulation caps investment by a single investor at 25 per cent. This limits the role of bail-outs by corporations like LIC. More importantly, this will be a method that is time-saving, cost-effective and compliant and can be done without disruption or destruction of price in the secondary markets.

It should be remembered that companies are allowed QIPs or qualified institutional placements in any case, and many would argue that this is unfair to minority shareholders. The same logic would apply to IPPs, although the fact that there are separate reservations for mutual funds and limits on the amount that one institution can be allotted would ensure fair distribution. One other feature is that this programme can only be used to reduce promoter holding and not otherwise. This ensures that the moment the promoter holding of any company falls below 75 per cent it would not be eligible to use the route.

In the past, the government has been accused of indirect divestment and having cross-holdings, as it does in the case of oil companies. The IPP route would ensure that the need for this does not occur and indirectly protect investor interest.

Let me take the example of the divestment that has taken place this year, of PFC. The company came out with an FPO and the price band fixed was Rs 193-203. The price band was announced during the weekend. The closing price on the Bombay Stock Exchange was Rs 214.55 and the top end of the price band was Rs 203. There was a discount to retail and eligible employees of five per cent. The share is traded in the F&O segment and the cash price and the FPO price converged by the time the shares were listed. The point I am making is that the price band for the FPO would be at a discount to the current market price, and an additional discount to retail, all taking its toll on the share price. The IPP route should be used where there is a belief that the public at large is unlikely to be interested, otherwise the auction route on the stock exchanges would be a better idea.

One small suggestion: there should be a lock-in of maybe 30 days for shares bought through an IPP, since it would prevent a sudden increase in liquidity in the market that could impact prices adversely.

There would be one area in which the retail investor would have a genuine complaint. The discount of five per cent that was being given to investments they made would now not be available. The issue of whether such discounts can be given in some manner in the case of the auction through stock exchanges needs to be examined, otherwise I believe that the steps taken by Sebi in introducing the IPP route would actually help companies meet listing norms. Sebi now needs to ensure that those companies that do not bring down their shareholding to the stipulated level are penalised and strict action taken against them.

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First Published: Wed, January 11 2012. 00:56 IST