Offer for sale route gains in popularity
4 min read 11 Oct 2012, 12:03 AM ISTOFS issues are likely to dominate the market as long as they remain volatile
PremiumPhoto: Nandu Chitnis/ Wikimedia Commons
(Nandu Chitnis/ Wikimedia Commons)
Mumbai: Listed companies that deferred plans to raise money from the equity markets because of their volatility in the past two years have instead been opting for the offer for sale (OFS) route—similar to selling shares on the bourses through auction.
In the seven months of its introduction by the market regulator, six Indian companies have raised ₹ 14,730 crore through the OFS route, with the largest being the ₹ 12,405 crore issue by state-run oil producer Oil and Natural Gas Corp. Ltd, a transaction that admittedly skews the figures.
Analysts expect the OFS route to become more popular because the current market rally, spurred by the government’s reform-oriented actions, took everyone by surprise. The lead time for a public share sale through the IPO (initial public offering) and FPO (follow-on public offer) routes is typically two-four months, while it is one day for an OFS. Most companies don’t think the current rally will last as long, add these analysts, and will likely prefer other ways to raise money—including OFS.
Adani Power Ltd, the latest to join the ranks, raised ₹ 193 crore on Monday.
On the other hand, ₹ 1,410 crore has been raised through 18 IPOs and ₹ 7,036.62 crore through 16 rights issues during the calendar year. There haven’t been any FPOs so far in 2012. Qualified institutional placements are at ₹ 1,544.82 crore.
In February, the Securities and Exchange Board of India (Sebi) created two new routes for raising public money and diluting promoter shareholding to meet the minimum public shareholding norms before the deadline.
The two routes—OFS and institutional placement programmes (IPPs)—allow all companies to pare the promoter stake through an auction of shares on stock exchanges during normal market hours to comply with minimum public holding norms.
All private listed firms are required to attain a minimum public shareholding of 25% by June 2013, while state-run listed firms are required to have at least 10% held by the public by August 2013.
Sebi has permitted the top 100 listed companies to use OFS both to raise public money and reduce the promoter holding. Since the OFS and IPP routes allow promoters to sell shares on the bourses with faster regulatory clearances, without much paperwork or the need for roadshows, they help companies raise capital faster than other methods, thereby curbing market volatility risks.
The India NSE Volatility Index has risen 1.45% from January 2011 till date—to 16.8 from 16.56.
OFS issues are likely to dominate the primary market as long as equity markets remain volatile and companies need to meet the minimum public shareholding norms stipulated by the capital market regulator.
OFS issues are dominant mostly because of the deadline on minimum public shareholding, according to Prithvi Haldea, chairman and managing director of Prime Database, a Delhi-based primary market tracker.
However, this may not be completely true. The government, too, has abandoned traditional capital-raising routes this year and chosen OFS for divesting its shares in state-run firms that are already compliant with the minimum public holding norms. As a part of its ₹ 30,000 crore share sale plan, the government, on 7 September announced that it would offload some of its shares in NMDC Ltd, National Aluminium Co. Ltd (Nalco) and Neyveli Lignite Corp. Ltd (NLC).
All three divestment issues will be done through OFS on stock exchanges. The government, which currently holds 90% stake in NMDC and 87.15% in Nalco, plans to disinvest 10% and 12.15%, respectively, in the firms through OFS. Both NMDC and Nalco are compliant with public holding norms. In NLC, where the government holds 93.56%, it will sell 5% through the share auction route.
“With the markets showing some strength, the number of such issues is expected to go up in the next six months," Haldea said.
Tarun Kataria, chief executive (India) at Religare Capital Markets Ltd, said: “The relative success of OFS as an issuance method can be attributed to the relative ease of issue, the absence of high transaction costs and a looming deadline where promoter holding must come to 75% or lower by June 2013. As a result, we have seen some large ticket deals which skew the numbers."
Several listed firms had been finding it difficult to sell promoter shares in the wake of weak equity markets before OFS and IPP were introduced.
Conventional routes such as IPOs and FPOs, which typically take more than a month to hit the market after they are announced, expose the company to volatility risks, as the stock price can change drastically in the run-up to the issue.
On Tuesday, the ₹ 2,500 crore IPO of state-owned steel maker Rashtriya Ispat Nigam Ltd, which was supposed to open on 15 October, was postponed by the steel ministry over valuation issues. This is the third time the issue has been postponed. The company’s planned roadshow in Mumbai on Wednesday was cancelled.
“Fund mobilization from the primary market this year has been minuscule compared to past several years," said Tejesh Chitlangi, senior associate at Finsec Law Advisors, a Mumbai-based corporate law firm. “Hence, increased number of OFS in companies already compliant with the minimum public shareholding norms may not be deliberate, but more a coincidence due to overall reduced primary market activity and also as a result of push from private equity players wanting to exit."
In the first two quarters of the calendar year, there have been 57 exits by private equity firms.
Even though Indian markets have been rising over the past few weeks on the back of announcements of policy reforms by the government, volatility persists and companies are still sceptical about floating large public issues.
The 30-share bellwether index, the BSE Sensex, is trading 21.06% up from its year-opening levels, though most of the gains came in the past few weeks. However, things may change once market sentiment revives and companies start floating IPOs.
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