Monday, January 9

Sebi creates two new routes for sale of shares

Mumbai: In an effort to help Indian companies raise capital and increase public shareholding in rough market conditions, the capital market regulator on Tuesday created two additional ways through which listed local firms can sell shares without floating a public issue.
The two new share-sale methods announced by the Securities and Exchange Board of India (Sebi) after a board meeting are the institutional placement programme (IPP) and the offer for sale through stock exchanges. These are expected to ease the process of increasing public shareholding for Indian companies.
The finance ministry in 2009 had directed all listed firms to mandatorily enhance public shareholding to a minimum of 25% by 2013. Companies, however, were barred from using the qualified institutional placement (QIP) route to comply with this rule.
Added to that, owing to the rough equity markets, domestic listed firms were compelled to avoid the traditional follow-on public offer (FPO) route to increase public holding before the deadline of June 2013. State-owned firms were later exempted from this rule.
Out of the 4,700 firms listed on BSE, 2,700 have a public holding below 25%.
In the last calendar year, Indian benchmark indices fell by at least 24%, mirroring the weakness of global markets and the slowdown in the world’s affluent economies. According to Mint research, in 2011, only two FPOs were launched, raising Rs. 8,055.20 crore compared with eight in 2010 for Rs.31,577.25 crore.
Also, fewer companies listed shares through initial public offerings (IPOs). Compared with 64 IPOs worth Rs. 37,534.65 crore in 2010, there were only 38 in 2011 for Rs. 6,028.28 crore.
The new routes signify faster, cheaper and safer methods of raising money for promoters.
Through the IPP route, listed firms can increase their public shareholding by up to 10% till they comply with the minimum public shareholding requirement of 25%. IPPs can be used for both fresh issuance of capital and dilution of stakes by the promoters. This route can be used to offer shares only to qualified institutional buyers (QIBs) and at least 25% has to be reserved for mutual funds and insurance firms.
The issuer company will have to announce an indicative floor price or price band at least a day prior to the opening of an IPP.
There have to be at least 10 allottees in every IPP issuance and no single investor can be given more than 25% of the total shares on offer. Allotments can be made on price-priority basis, proportionate basis or according to pre-specified criteria, to be disclosed in advance in the draft red herring prospectus.
This will provide state-owned firms with an additional avenue through which they could potentially meet the divestment target for the fiscal year.
The government had set a target of Rs. 40,000 crore to be raised from the sale of shares in state-owned firms in the fiscal year, but turbulent markets have put this out of reach. Since 1992, when the government started its divestment process, the target has been missed 11 times.
State-owned companies that have cabinet approval for divestment can use IPPs to offload shares without having to worry about retail investor appetite for their equity.
The second route—the offer for sale of shares through stock exchanges—is akin to selling shares on the bourses through auction. The stock exchanges will offer a separate window for such share sales that would be open during normal trading hours.
Under this method, the issuer company has to offer at least 1% of its paid-up capital or equity worth a minimum of Rs. 25 crore. Only the promoters will be allowed to offer shares for sale. The bidders will be required to pay 100% margin in cash upfront against every buy order.
The market regulator said that apart from companies using this route to comply with minimum public shareholding requirements, promoters of the top 100 firms in terms of average market capitalization can also use it for sale of their holdings.
In addition to this, to enhance the efficiency of buy-back offers and bring all classes of shareholders at par for such offers, the regulator amended buy-back regulations.
For all tender offer methods of buy-back of securities by listed Indian firms, a company will have to announce the ratio of buy-back, similar to that of rights offers. To do this, the company will fix a record date for the determination of entitlements as per shareholding on that date.
While the shareholders will be allowed to tender shares over and above their entitlement, the acceptance of such shares will be based on the entitlement of each shareholder in the first step.
Following this step, if any shares are left to be bought back, the company will accept additional shares tendered in proportion of the excess shares tendered by the shareholder over and above his eligibility.
Sebi has also revised the timelines for such buy-back offers to reduce the time taken for their completion.

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