Mumbai: India’s capital market regulator, the Securities and Exchange Board of India, or Sebi, may introduce a new pricing formula for the various fund-raising windows available for cash-starved companies, to reduce exposure to volatility in a bear market.
The proposed formula will shorten the period for which the average traded price is sought in order to arrive at the issue price, said a person familiar with the development who did not wish to be named.
Apart from this, the regulator also plans to trim the time lag in a rights issue, including the notice period to shareholders, and the period between pricing and completion of these issues, the same person said, adding that an announcement regarding this could be made in the next few weeks.
The Sebi move is aimed at reducing the gap between the market price and the issue price of stocks, including for fund-raising methods such as qualified institutional placements, or QIPs, and foreign currency convertible bond, or FCCB issues.
A QIP is the private placement of shares or securities convertible into stocks by listed companies to qualified institutional buyers, such as banks, insurance companies, mutual funds and foreign institutional investors.
A rights issue allows a company’s shareholders to buy a proportional number of additional shares, usually at a discount to market price, within a fixed period.
Sebi’s move will help publicly listed companies tap these windows for growth funds at a time when the cost of capital is moving upward, said bankers. Some $7-8 billion (Rs29,746-33,996 crore) worth of QIP issues are pending because of pricing issues, say bankers.
The existing Sebi formula, which was set to protect minority investors, fixes the higher of the average trading price of the past six months, or the average during the previous two weeks as the price of a stock in such issues. However, after the stock market slump, these windows became defunct as there was a big mismatch between prices arrived at by this formula and market prices. India’s benchmark equity index, the Sensex, is down about 30% since the beginning of this year.
Prices of many Sensex 30 stocks as well as other large and mid-size companies have dropped much more than the index this year. Since these stocks are available at a discount in the secondary markets, there were few takers for issues, especially of QIPs.
“If the QIP pricing formula is changed, it will allow corporations to keep their capex (capital expansion) plans on track, with access to public equity funding in volatile market conditions,” said P.V. Krishna, head of equity capital markets, India, at Lehman Brothers.
Even long-term institutional investors, such as local insurance funds and foreign pension funds, stayed away from issues of fundamentally sound, large Indian companies, as the pricing mechanism could lead to mark-to-market, or MTM, losses. Mark-to-market is an accounting practice of assigning a value to a position held in a financial instrument based on the current market price for that instrument.
“None of these institutional investors wish to account for MTM loss in their stock portfolio, which could already be facing enough MTM losses,” notes the head of equity capital market products at a US-based bank in India who didn’t want to be identified.
As the response of institutional investors to issues priced using the existing formula was extremely poor during pre-issue marketing drives by investment bankers—who, in turn, were advisers to issuer companies—most issues ended up on the shelf.
There has not been a single QIP issue since March.
In a 24 July report by Mint titled, “No takers for QIPs in a falling market”, executives at eight leading investment banks had said that the pricing formula for QIPs does not match the market reality of many stocks and that the regulator should take a relook at the formula.
Large companies which pulled back their QIP issues include real estate company Unitech Ltd, which had planned a $1.5 billion issue.
According to bankers, Indian companies had raised about Rs25,000 crore in capital through the QIP window in fiscal 2007.