Mumbai: BSE Ltd will float its initial public offer (IPO) in the first quarter of fiscal 2014 through the offer-for-sale (OFS) route, said two people with direct knowledge of the matter. Asia’s oldest bourse will be India’s first stock exchange to list its own shares.
“If the investment bankers value the company at Rs.4,000 crore, the exchange will dilute only 10% to raise Rs.400 crore through the IPO, but if the valuation is lower, 25% stake of the existing shareholders could be sold through the IPO,” said one of the people.
OFS is a method to sell shares to the public through an auction on a stock exchange during market hours. In February last year, the capital market regulator introduced this for companies to dilute promoter holding to comply with minimum public holding norms beside listing shares through an IPO. It doesn’t take much time and curbs market volatility and manipulation risks to a large extent as the issue is made during market hours and the price of share allotment is indicated a day ahead of the issue or during the issue, unlike IPOs, where price bands are announced much in advance. Also, the cost of floating an OFS is much cheaper than a conventional IPO.
BSE has appointed 14 investment bankers to handle the issue, including foreign bankers Bank of America Merrill-Lynch (BofA), UBS Securities India Pvt Ltd, JP Morgan India Pvt Ltd, and Barclays Securities (India) Pvt Ltd and domestic investment bankers Edelweiss Capital Ltd, Kotak Mahindra Capital Co. Ltd, Axis Capital Ltd, SMC Capitals Ltd, Motilal Oswal and India Infoline Ltd.
The Securities and Exchange Board of India (Sebi) allowed stock exchanges over three years old to list their own shares through an IPO in June last year after accepting the recommendations of the Bimal Jalan committee that framed guidelines for market infrastructure institutions.
BSE’s public offer will create an exit route for many of its existing shareholders. The exchange has 6,000-odd shareholders who want to cash in on their stakes, but the extent of dilution will depend on the valuation of the exchange. If the valuation is lower than Rs.4,000 crore, BSE will sell 25% to enable the maximum number of stakeholders an exit and, at the same time, the listing norms will also be adhered to, said the second person. None of the officials wanted to be named.
A BSE spokesman declined to comment.
Under listing norms, a company is required to dilute at least 25% unless its valuation is Rs.4,000 crore and if the valuation is more, only 10% can be diluted through an IPO.
“If BSE announces it will dilute 10% in the IPO but its shareholders want to dilute more, allotment will be done on a pro-rata basis. But if before filing the draft red herring prospectus (DRHP) with the regulator, investment bankers see huge interest at a lower valuation, 25% will be sold through the IPO,” said the first person.
The bankers are expected to file the DRHP in next few weeks.
In 2010, US business magnate George Soros bought a 3.9% stake in BSE for about Rs.160 crore from Dubai Financial Group, valuing it at around Rs.4,000 crore.
However, later on, shares of the exchange changed hands at a lower value. Still, it expects to maintain the Rs.4,000 crore valuation with the company having a reserve of around Rs.1,800 crore and its iconic building at Fort, Mumbai, 117.96m tall Phiroze Jeejeebhoy Towers, valued at around Rs.700 crore. “With income increasing from various segments of trading, we expect the valuation at around Rs.4,000 crore,” the first person said.
In the September quarter, the latest quarter for which data is available on the BSE website, the exchange earned a net profit of Rs.26.14 crore on a total income of Rs.131.26 crore.
BSE’s main rivals are National Stock Exchange of India Ltd and MCX-SX Ltd. Currently, BSE clocks a monthly average turnover of Rs.2,512.62 crore in cash segment and Rs.34,972.36 crore in equity derivatives compared with Rs.12,689.2 crore and Rs.1.12 trillion, at NSE. MCX-SX is yet to start trading in equity and derivatives.
“BSE’s book value is high because of its building and assets. Going by volume activity, BSE has roughly one-third market share. The valuation should also be roughly in that proportion. The derivatives volumes are slowly picking up on BSE although the open interest figures are low. However, some of the foreign institutional investors have started participating in derivatives segment, which is a good sign,” said Prakash Kacholia, managing director, Emkay Share and Stock Brokers Ltd.
“Going by BSE’s net profit for financial year 2012, at the expected valuation of Rs.4,000 crore, the price-to-earnings multiple comes to around 22,” Dinesh Thakkar, managing director of Angel Broking Ltd, said. “This is comparable with MCX-SX’s valuation and I would say it is fairly priced.”
The quality of income of BSE, though, is different, deriving a chunk of it from interest income owing to its huge cash balance, while MCX-SX’s income is mostly from operations, Thakkar said. “For a short term investor, the issue may not be that attractive. However, given the fact that the economic slowdown has affected equities, any recovery in wider economy will boost equity markets and from that perspective, this is an attractive issue for long-term investors.”
BSE is giving final touches to its IPO plans at a time when its newest rival MCX-SX is about to start equity trading and the competition in the trading space is set to intensify, potentially increasing attrition of key employees in the exchange space.
A news report in The Economic Times earlier this week said BSE has increased salaries by 50-80% and promoted some of its executives to retain talent ahead of the launch of MCX-SX’s equity trading segment.
The BSE spokesman said its wage bill go up by 7% and the salary cost will not exceed its budget for the current financial year.