Mumbai: India’s capital markets regulator on Monday introduced changes that would allow retail investors to buy shares in follow-on public offers, or FPOs, at a discount.
The Securities and Exchange Board of India, or Sebi, said the auction-based book building method for FPOs will allow institutional investors to bid for shares at any level above a pre-set price and shares will be allotted at different prices.
FPOs are floated by companies that are already listed on exchanges but want to raise funds by issuing some more equity shares.
The new norms, announced by Sebi chairman C.B.Bhave, are significant as the Indian government is considering a proposal to increase public holding in all listed companies to 25%. This is likely to be done through a phased reduction of stake over three years through FPOs.
Under current norms, such issues follow the book building route, under which shares are offered within a price band and sold at a particular price to all investors.
Now, investors will pay different prices, depending on their bids. Also, retail investors, for whom normally 30% of shares are kept, will get shares at the floor price. This means the retail investors will always pay less than institutional investors.
At least 60% of such issues are subscribed to by qualified institutional bidders and 10% is kept for high net worth investors.
Prithvi Haldea, chairman and managing director of Delhi-based Prime Database, a firm that tracks the primary market, said the move was welcome for all parties. “It gives the company a better price as it is not limited by a band and the institutions get a free hand to buy at any price. Finally, the retail investors get the shares at the lowest price,” he said.
Sebi has allowed the issuing company to set caps on maximum shares allotted to a single bidder.
“If the issuer desires to place a cap either in terms of number of shares or percentage to issued capital of the company in order that a single bidder does not garner all shares on offer and there is wider distribution, the same may be permitted,” a Sebi release said.
Ever since Sebi introduced a faster and more efficient way of qualified institutional placement (QIPs) in 2006, not too many Indian firms have taken the FPO route to raise equity but the scene may change with the government planning to go for phased divestment of its stake in public sector undertakings.
From 19 issues raising raising Rs12,764 crore in 2005, the number of FPOs went down to just one issue raising Rs23 crore in 2008. In calender year 2009, just one company -- Rishabdev Technologies Ltd -- raised Rs 22.62 crore in August through an FPO. In contrast, 40 issues have raised Rs28434.5 crore in 2009 through QIPs.
Investment bankers said the new norms do not make FPOs attractive vis-a-vis QIPs. An executive of Motilal Oswal Investment Advisors Pvt Ltd. said, “The issuers preference for a particular route to raise capital is a function of how long it takes to raise money and at what valuation. On these counts, QIPs score over FPOs. By bringing in the flexibility in the bidding process, we are not in any way making FPOs more attractive.” He did not want to be named.
Sebi has also halved the minimum market cap requirements for a company to go for fast-track issues from Rs10,000 crore to Rs5,000 crore, making smaller companies eligible for the route.
The fast track route was introduced in 2007 in order to enable well established and compliant listed companies to access the primary market in a time effective manner through follow-on public offerings and rights issues.
The regulator also eased norms for stock listing and earning reports by announcing a number of concessions for small and medium enterprises. Such firms can list their shares on the existing exchanges and banks will bear the responsibility of market making for a period of three years and ensure that these issues are 100% underwritten.
However, only 15% of the issue size will be mandated to be compulsorily underwritten by the merchant bankers.
Preparation and submission of financial results (as mandated in the listing agreement) for small and medium enterprises will be on a half yearly basis instead of quarterly basis.
Nearly a year after Sebi’s three-member panel passed an order against National Securities Depository Ltd (NSDL) on the initial public offering (IPO) irregularities of 2005-06, the regulator said the findings of the panel against Sebi board are not valid.
Sebi said that the findings of the committee against the board were outside the confines of delegation and, therefore, they were without the authority of the law.
The committee found that the Sebi board failed as a regulator, while disposing of two matters relating to IPO irregularities and DSQ Software Ltd. “These findings against the board are outside the confines of delegation and therefore, these are without the authority of law,” Sebi said.
In April 2006, the regulator unearthed a racket in which 59,000 fictitious demat accounts were opened to corner shares meant for small investors. These accounts were opened at the country’s two depositories, NSDL and Central Depository Services Ltd (CDSL), with the help of depository participants and market operators, who allegedly used or helped some entities use the profits made out of IPO investments.
Sebi’s present chairman Bhave was heading the operations at NSDL when these fictitious accounts were opened. Bhave, however, had recused himself from the matter before joining Sebi and was, therefore, not part of the committee constituted by the regulator.
In August 2008, the regulator had constituted the three-member committee consisting of G. Mohan Gopal, director or National Judicial Academy in Bhopal; V Leeladhar, then deputy governor of the Reserve Bank of India; and Anurag Goel, secretary at the ministry of corporate affairs; to look into the proceedings against NSDL.
The committee issued its orders against the depository on 4 December 2008, but the orders were never made public on the Sebi website.
In April, Sebi appointed an external legal counsel to examine whether the committee had acted within the framework.
According to Sebi, the committee’s comment on the failure of the regulator has “vitiated” these orders. They are “null and void and and are non est.”
It will make public these two orders and “dispose of these matters afresh”.