The Securities and Exchange Board of India (Sebi) has proposed key changes to how companies buy back shares and how promoters can lower their stakes in their companies. It also makes share buy-backs through the tender route more beneficial for promoters, since it will now become proportionate to the size of shareholding. On the face of it, the rules make it easier for all promoters to ensure they meet the minimum public shareholding limit.
But the buzz is that a big promoter—the Indian government —will benefit the most from these changes. If the government unleashes a slew of stake sales and public sector units (PSUs) roll out share buy-backs, as is being speculated, then that theory gains credibility.
But nothing prevents other promoters from benefiting from these rule changes, too.
One set of changes deal with companies where the public shareholding is below 10% for PSUs and below 25% for other companies. They get two additional windows for reducing their stake. One is an institutional placement programme (IPP), somewhat identical to the qualified institutional placement route, but with some differences beneficial to the issuer. The IPP route specifies a minimum of 10 allottees, but does not specify a maximum; the issue can have either a floor price or a price band; and pricing is discretionary, but has to be disclosed beforehand. It can be a fresh issue or a stake sale by the promoter. There is an upper limit for the issue of 10% of the equity capital or till the minimum public shareholding requirement is met. That is, if a non-PSU company has a public shareholding of 18%, it can use the IPP route to increase the public stake by 7% only.
Another option to lower promoter stakes is a new offer for sale window on the stock exchange, which improves upon the block trading window concept. Promoters can sell their stake through this window, and no limit has been specified on the price variation from the previous close. There is a 1% variation limit at present on block trades. This will mean that promoters can offload large shares, with flexibility on pricing. A surprising addition here is that Sebi has also allowed the top 100 companies by market capitalization to sell stakes. The rationale or timing for this move is unclear. It is not as if promoters were hankering to sell their stake or, if they were, were finding it difficult to do so. Does this mean that the government will offload stakes in PSUs that comply with the 10% public shareholding limit through the stock exchange window?
The last change is for the share buy-back rules pertaining to tender offers, which is rarely used, with most firms preferring the market route through stock exchanges. Critical differences between a tender offer and a market offer are that promoters are allowed to tender their shares and the price is fixed.
Sebi is aligning the tender buy-back acceptance mechanism to that of rights issues, making it proportionate based on shareholding. At present, it is based on the number of shares submitted as a percentage of the total buy-back issue size. In a tender buy-back, promoters will be assured of acceptances based on their equity holding. If PSUs make share buy-backs, the government will be assured of getting a lion’s share of the proceeds.
These rules make it easier for promoters to bring down their stakes to prescribed limits, to raise money through stake sales and share buy-backs. The buy-back rule appears particularly unfriendly to minority shareholders. If this results in a slew of buy-backs by companies through the tender route (a relatively unused mechanism), it will come in for criticism.
These measures may make it easier for the government to disinvest, but success ultimately depends on investor appetite. Investor sentiment at present is in the dumps. The prospect of a load of PSU paper coming on sale should make investors nervous. And if it’s going to be a steady incremental sale, the nervousness will only increase. That may lead to government asset sales being dogged by falling valuations, bringing them back to square one.
What the government needs to make its disinvestment programme a success is a series of hardnosed reforms. Procedural changes can take it only so far.
We welcome your comments at firstname.lastname@example.org