Mumbai: India’s capital market regulator on Tuesday relaxed rules to help companies raise capital and to comply with public shareholding norms, offering them a degree of relief against sliding markets and an economic downturn that have made tapping investors difficult. Listed firms have been allowed to auction shares on the stock exchanges more frequently while investors in such offerings will no longer be required to pay the entire bidding amount upfront.
Promoters of listed firms will be allowed to sell stakes through the so-called offer for sale (OFS) and institutional placement programme (IPP) methods even within the cooling-off period of 12 weeks they were required to observe from their previous share sale through other routes, the Securities and Exchange Board of India (Sebi) said after a board meeting.
The OFS route can be used either to comply with the public shareholding norms or, in the case of the top 100 listed firms by market capitalization, to simply raise capital. The IPP method can be used by promoters of any listed company to dilute up to 10% of their holding only for the purpose of complying with the minimum public shareholding norms. Only qualified institutional buyers can subscribe to an IPP.
In February, the markets regulator introduced the two new share-sale avenues to help listed companies in the private sector comply with the minimum public shareholding norm of 25% before June 2013, and state-owned firms meet the requirement of 10% public holding before August 2013.
India has around 180 private sector listed companies with a public holding of less than 25% and at least 16 state-owned ones with a public ownership of less than 10%.
A follow-on public offer had previously been the only route available to promoters to raise capital and meet the norms, but a declining stock market closed that route. The benchmark Sensex index of the BSE has dropped 7% in the past one year, forcing many companies to put off plans to tap public investors, as economic growth slowed.
Some stringent conditions have limited the market for fund-raising through the OFS and IPP routes. Only state-owned Oil and Natural Gas Corp. Ltd and Wipro Ltd have used the OFS route since it was opened by Sebi; Godrej Properties Ltd adopted the IPP route to dilute its promoter holding.
Two of the main obstacles in the new share sale routes was the time gap of 12 weeks between two issues and the 100% upfront margin requirement for investors bidding in such offering. On 2 May, Mint reported that Sebi was revisiting these share sale norms.
Under the new norms, institutional investors will have the option of applying with an 100% upfront margin in cash or with a lower, “ad hoc” margin to be decided by the exchanges, Sebi said. An investor paying less than 100% upfront cannot modify the bid amount.
Sebi has been in discussion with bankers to review the share sale norms to help companies raise capital and meet public holding norms without worrying about the market conditions.
“Most of the issues have been addressed. If the public shareholding norms are to be met, the primary market will see papers worth Rs20,000-30,000 crore. So this was essential, especially in such a market condition,” said Gesu Kaushal, executive director, Kotak Investment Banking.
Disclosure rules in the pricing of IPP or OFS shares were also changed by Sebi. Companies can now indicate prices of shares in an OFS during the last one hour of the bidding session, irrespective of the book built. Earlier, this was not allowed.
In the Rs.12,000 crore OFS issue by ONGC earlier this year, bankers blamed Sebi rules for the lukewarm response it received. Several institutional investors also complained that they were not sure of picking up the ONGC shares as they could not gauge market appetite in the absence of an indicative price. State-owned Life Insurance Corp. of India (LIC) bought nearly all the shares on offer in what was then seen as a bailout at the behest of the government, although both LIC and the government said it was purely a commercial decision.
“If the seller intends to disclose the floor price, the price will be disclosed after the close of business hours on (T-1) day (i.e. a day prior to the OFS issue),” Sebi said. Investors cannot modify their bids during the last one hour from the close of a bidding session instead of the last 30 minutes as required under the previous rules.
Additionally, to improve the quality of financial reporting by listed firms, the regulator will create a qualified audit report review committee represented by the Institute of Chartered Accounts of India (Icai) and the stock exchanges. “... it has been decided to put in place a mechanism to process qualified annual audit reports filed by the listed entities with stock exchanges and annual audit reports where accounting irregularities have been pointed out by Financial Reporting Review Board of Icai.”
In an effort to improve corporate governance and protect the interests of minority investors, Sebi has made electronic voting mandatory for listed firms who use postal ballots by shareholders for voting on issues. This will be implemented in a phased manner and initially only the top 500 listed firms at stock exchanges will be required to comply.
The regulator also attempted to put the rules for initial public offerings (IPO) by infrastructure companies on par with those for other sectors. Infrastructure firms, so far, had easier IPO rules in terms of subscription and allotment. On Tuesday, Sebi said that even infrastructure firms will be required to get at least 90% of the offered shares to be subscribed to raise money through an IPO.