Mumbai: In a move calculated to aid fund-starved firms, capital market regulator Securities and Exchange Board of India, or Sebi, on Wednesday announced changes in rules for two important equity capital market products—rights issues and private placement of stocks with qualified institutional investors, known as qualified institutional placements, or QIPs.
(To listen to Nesil’s analysis of Sebi’s move click below)
According to investment bankers, Sebi’s move will help publicly listed firms tap these fund-raising windows for growth funds at a time when the cost of capital is moving upward.
Around $7-8 billion (Rs29,746-33,996 crore) worth of QIP issues are pending because of pricing issues, say bankers.
Companies “can now look forward to fund-raising from the capital markets efficiently and quickly and move forward on their capital investment plans,” said Ramesh Srinivasan, chief operating officer of investment bank Kotak Mahindra Capital Co. Ltd.
“Sebi’s move will provide access to public equity funding in volatile market conditions,” said the head of equity capital markets at a US-based investment bank who did not wish to be named.
The pricing formula for QIP issues, which was earlier the higher of the average trading price of past six months or the previous two weeks’ average, has been cut down to the average price of two weeks.
After the stock market slump, this window has become almost defunct as there is a big mismatch between the prices arrived at by this formula and market prices.
The Bombay Stock Exchange’s benchmark equity index Sensex has lost at least 25% since the beginning of 2008.
However, the prices of many large and highly liquid stocks have dropped much more than the index this year. Since these stocks are available at a discount in the secondary markets, there have been few takers for QIPs priced higher on the basis of the earlier formula.
“There will be further review to bring down the time for completing the rights issue,” said Sebi chairman C.B. Bhave.
The reduction in timeline for rights issue will be applicable to all firms, over and above the fast-track window that is currently available.
Firms with an average market capitalization of Rs10,000 crore, and with a equity capital market history of more than one year, are eligible for a fast-track issue of shares.
On 1 August, Mint had reported that Sebi may introduce a new pricing formula for QIPs and cut the time frame for rights issues to reduce exposure to volatility in a bear market.(To read that story click here.)
In a separate report on 24 July, Mint reported that, in a falling market, the existing formula set by Sebi on the pricing of a QIP issue had become a key hindrance and this window had completely shut since March, quoting half-a-dozen investment bankers.
A QIP is the private placement of shares or securities convertible into stocks by listed companies to qualified institutional buyers, such as banks, insurance companies, mutual funds and foreign institutional investors.
A rights issue allows a company’s shareholders to buy a proportional number of additional shares, usually at a discount to the market price, within a fixed period.
Large companies which pulled back their QIP issues include real estate firm Unitech Ltd, which had planned a $1.5 billion issue. According to bankers, Indian companies had raised about Rs25,000 crore in capital through the QIP window in calendar 2007.
Apart from changing norms on these two fund-raising windows, Sebi’s board has also reviewed its current norms on participatory notes, or PNs, which are contracts issued by foreign brokerages to their offshore clients, not registered with the market regulator, promising returns that are equivalent to those of an underlying transaction involving Indian equities.
The regulator is also studying the issues faced by the exchange traded platform introduced for the stock lending and borrowing mechanism (SLB), which has failed to take off.
However, it has not arrived at any decision on either of these critical issues.
Sebi has also amended clause 41 of the listing agreement on the declaration of financial results by listed companies.
According to the new rule, a company can submit the consolidated results within two months after the end of the quarter, in addition to submitting quarterly and year-to-date stand-alone results within one month.
The time period for dispatching the annual reports of mutual funds to their unit holders has been reduced from six months to four.