It’s interesting that the Securities and Exchange Board of India (Sebi) is still considering making improvements to the OFS (offer for sale) instrument companies use to comply with public shareholding norms. The regulator’s warning against non-compliance has caused many companies to take the mid-2013 deadline seriously and come out with a string of issues. In 2012, OFS issues accounted for two-thirds of the Rs.36,253 crore raised through public equity markets, data collated by Prime Database show.
According to an investment banker, the changes being considered by Sebi, such as increasing the settlement timeframe to ‘T+2’ and aligning margin requirements with those in the secondary market, should be seen as mere improvements to facilitate smooth functioning. After all, the success of the product in late 2012 shows that major changes to the existing framework aren’t necessary.
Increasing the settlement timeframe is an important improvement. Currently, OFS transactions have to be settled on a ‘T+1’ basis. According to the banker, this provides arbitrageurs a convenient trade, whereby they short sell shares in the secondary market (where settlement has to be done on a T+2 basis) and then buy in the OFS (which is priced at a discount). Delivery for the short sale trade can be made using the shares received in the OFS the previous day. By increasing the settlement period to ‘T+2’ in the OFS, this arbitrage trade will not be possible.
Sebi’s policies with respect to compliance of public shareholding norms are commendable. On one hand, it has made it clear that the mid-2013 deadline will not be extended. On the other, it has been more than willing to take feedback from the market to improve the OFS instrument and facilitate share sales by promoter shareholders.
Sebi even allowed companies to issue bonus and rights issues only to non-promoter shareholders in order to comply with public shareholding norms. At first look, this seems like an absurd solution, since it will amount to gifting shares free to public shareholders at the expense of the promoters, but at least three companies have already exercised this option. Gammon Infrastructure Projects Ltd, Pentokey Organy (India) Ltd and Westlife Development Ltd issued bonus shares only to non-promoter shareholders to avoid the cost and effort of making a public issue of shares. In Gammon’s case, the promoter shareholding of 75.53% was just a tad higher than the prescribed limit and it made more sense to gift non-promoter shareholders bonus shares in the ratio of 1:34 rather than hit the markets with an issue of less than Rs.6 crore.
Since a large number of companies has already complied with the public shareholding norms, the remaining ones have little excuse to not comply in the remaining six months.