The June 2013 deadline isn?t really approaching but Sebi?s decided to make it easier for promoters, who hold more than a 75% stake in their companies, to shed enough of it so as to be able to comply with the listing guidelines under the Securities Contracts Regulation (Rules), 1957. The objective seems to be to facilitate bigger floats as soon as possible; in the process, companies or promoters can pick up some money. The capital market regulator says shares up to 10% of the equity of the company can be placed with institutional shareholders, through an institutional placement programme (IPP) so that there?s a 25% public float. So far, Sebi had restricted companies from doing what?s called a qualified institutional placement (QIP), if they were bringing down their stakes to 75%; their options included a block trade or FPO. Given the state of the market, it seems a good idea to steer clear of FPOs and let bigger investors buy into companies.

Even if a QIP had been allowed, the IPP, which makes room for insurance companies and mutual funds, is clearly a more effective mechanism. For one, the QIP rules required the price, at which the shares were placed, to be the average of the highs and lows of the two weeks prior to the placement date. That meant the company needed to time the issue in order to be able to get a good price for the shares; many a QIP has been held back because of a volatile market and especially one that?s trending down. In fact, at times, the market price may not reflect the true value of the company if the counter is illiquid. Also, typically, speculators do drive down the price of a stock as soon as an FPO or a QIP is announced; this has happened with some very illiquid PSU scrips.

The IPP mechanism allows for an ?indicative? floor price or a price band so there is an element of price discovery. What?s more, shares can be allotted either on the basis of price, i.e. to the highest bidder, much like in a French auction, or they could be dealt in proportion with the size of the application or any other criteria. Of course, all this needs to be stated upfront but that?s more than a fair degree of flexibility. Sebi also wants to broad-base the equity base and has stipulated there should be a minimum of 10 allottees?the QIP norms allowed five for an issuance of more than R250 crore. That would ensure no one investor corners too large a chunk. The entire process also would be transparent; one can see, on the exchange, how the bids are stacking up and therefore whether the deserving candidates are getting their fair share of allotments. The allotment process has been sometimes murky, being left to the discretion of merchant bankers. Retail investors are not going to be part of any IPP but where a QIP is limited to 49 investors, Sebi wants more investors subscribing to an IPP.

The other way that promoters can offload shares, at least 1% of the equity or a minimum of R25 crore, is by auctioning them at a special window on the exchanges which will remain open during trading hours.

Much like the case is with IPOs or FPOs, the new ?offer for sale? mechanism too requires that bids need to be backed by cash in full so that they?re not inflated. The exchange will play watchdog to the allotments; shares will go to those who bid the highest prices in descending order. Or there could be a clearing price so those who bid at or above a cut-off price will get shares in proportion to the amount bid for. What helps in this kind of mechanism is the short duration during which the entire process is completed, otherwise it could take as long as two weeks between the time that the roadshows start and the book closes. A preferential allotment under section 81(1)(a) of the Companies Act is somewhat cumbersome because there is a fixed formula for pricing, companies need shareholders approval and, most important, there is a one-year lock-in for the allottees. Of course, it is a better method of allotting shares because it would attract better quality of long-term investors. But the need of the hour is flexibility, especially since the government needs to mop up money as part of its disinvestment target of R40,000 crore in the current year. That?s why this route has also been thrown open to promoters of the top 100 companies by market capitalisation. So far, the government has managed to raise a little over R1,100 crore in 2011-12 since many of the follow-on issues of ONGC, SAIL and IOC have had to be held back. Foreign institutional investors, big buyers of Indian stocks, have been too keen on India in a long while; in 2011, they sold stocks worth around $500 million whereas in 2010 they had shovelled up stocks worth $29 billion. Even now they?re not really too bullish about Indian equities although valuations have corrected because the market itself has been de-rated. However, they haven?t yet abandoned the country and there is clearly value to be found. Sebi has done its bit the government needs to make the most of it.

shobhana.subramanian@expressindia.com