Sebi may allow preferential, QIP options

Sebi may allow preferential, QIP options

Mumbai: India’s capital market regulator may give two more options to promoters to pare stakes to 75%—issuing shares through qualified institutional placements (QIPs) and preferential shares, four investment bankers familiar with the development said.

The government in 2010 asked firms to have a minimum 25% public shareholding by March 2013, to bring in accountability and transparency in listed firms. It allowed public sector firms to maintain a 10% public holding.

The proposal, at an early stage, is yet to be presented to the Securities and Exchange Board of India (Sebi), a senior official with the regulator said. If approved, it will speed up such stake sales and bring down the cost of paring holdings.

Promoters are now allowed to lower stakes by selling shares to existing shareholders or rights issues, or fresh shares through follow-on public offers (FPOs).

Current Sebi norms allow firms to issue shares through a QIP only if they adhere to listing norms where the promoter shareholding is below 75%.

None of the investment bankers Mint spoke to wanted to be named as the matter is not yet public. An email sent to the Sebi spokesperson last week did not elicit any response.

QIPs are made to qualified institutional investors, including mutual funds and insurance companies. A preferential issue is the sale of shares to a select group of persons or investors, who can also be promoters.

In the case of a promoter, the lock-in to stay invested is three years, while for a non-promoter it is one year.

While preferential allotments and QIPs take four-five weeks to complete, rights issues and FPOs take around four-five months as Sebi approval is required.

According to a banker with a domestic investment bank, the money spent to sell shares through a QIP is 2-2.5% of the capital raised, roughly half of what is typically spent for an FPO or a rights issue.

For a rights issue or an FPO, a company has to file a draft prospectus with Sebi and wait for its approval.

“It is time-consuming," said the banker quoted above. “By the time the issue gets approved, market dynamics can change and no promoter wants to dilute when the valuation takes a dip."

“Since there are no special benefits that these qualified institutional investors enjoy, there is no reason why a company should not be allowed to place the shares with select institutions," said Somasekhar Sundaresan, partner at corporate law firm J Sagar Associates.

As many as 65 companies on BSE-500 have promoter holdings in excess of 75% as of June, of which 27 were state-owned, according to data from Capitaline. BSE-500 comprises the 500 top traded firms on BSE, accounting for 93% of the bourse’s market capitalization.

Few firms have reduced stakes using the existing options.

Between June 2010 and June 2011, seven out of 35 firms were able to reduce their promoter shareholding marginally. Four increased it marginally, while others kept it unchanged.

“With the kind of volatile equity markets we have, it is difficult to execute a share sale through a rights issue or an FPO," said another investment banker with a foreign firm. “It is a laborious and expensive option to dilute promoter stake in a company."

India VIX, the volatility index of the National Stock Exchange, closed Thursday at 27.45. It had risen above 30 in the past two weeks as indices swung wildly.

“For companies with less than 80% promoter shareholding, a QIP is a better option," said a third banker. “For promoters who have more than 85% shareholding, buying more from the open market and delisting is also an option." According to him, some companies have started exploring this avenue.

The list of BSE-500 companies with substantial promoter shareholding include Fresenius Kabi Oncology Ltd (90%), Puravankara Projects Ltd (89.96%), BOC India Ltd (89.48%), Omaxe Ltd (89.14%), Alfa Laval (India) Ltd (88.76%), Gillette India Ltd (88.76%), Jaiprakash Power Ventures Ltd (86.96%), DB Corp. Ltd (86.45%), Bajaj Corp. Ltd (84.75%) and Godrej Properties Ltd (83.79%), according to BSE data.