Regulator plans to ease requirements on just how much of their stakes promoters will have to dilute in an IPO
Mumbai: The country’s capital market regulator plans to relax requirements on just how much of their stake promoters will have to dilute in an initial public offering (IPO) in a move aimed at reviving the primary markets.
The Securities and Exchange Board of India (Sebi) is considering a multiple slab system, under which the minimum amount of equity to be offloaded would be linked to the post-issue capital of the company, according to three persons, including a Sebi official, familiar with the matter.
At present, all companies with a post-issue capital below ₹ 4,000 crore are compulsorily required to offer at least 25% stake in the IPO, while companies with above ₹ 4000 crore post-issue capital are required to offer at least 10%.
“A number of IPO-ready firms, especially those with market capitalisation (post issue capital) less than ₹ 4,000 crore, have stayed away from a listing over fears that they may not be able to offload 25% stake in one shot," said one of the three people who asked not to be identified.
While the new slabs are still to be decided, smaller companies may be allowed to sell less than the 25% stake that is currently mandatory, added this person. However, the required minimum offer size would remain 10% of the company’s share capital.
“The present norm is somewhat restrictive. A company with a (post issue) capital of ₹ 3,990 crore requires to float at least 25%, while a company with just ₹ 10 crore more capital requires to dilute only 10%. The required offer size should be on a proportionate basis according to the size of the post issue capital," said Prithvi Haldea, chairman and managing director, Prime Database, a primary market tracking firm.
On 16 April, Sebi chairman U.K. Sinha asked investment bankers to come up with suggestions to revive the primary markets after gathering views of exchanges, brokers and corporations. Weak sentiment in the secondary markets, tepid retail investor interest and stretched financials of corporations together caused a steep fall in the funds raised via the IPO market.
In fiscal year 2013-14, ₹ 1,204 crore was raised via 38 IPOs, compared with ₹ 6,497 crore raised via 33 issues in the previous year.
“Sebi is concerned about the state of primary markets. The regulator is examining ways to encourage primary market issuances, reduce the timeline for IPOs and make the process more cost effective. Apart from introduction of a slab-based regime for IPOs, there could be some operative changes such as making IPOs mandatorily online, doing away with physical IPO application forms altogether," the first person said.
Sebi is also considering making mandatory the Application Supported by Blocked Amount, or ASBA mechanism, where applicants do not make any payments at the time of applying, the amount is “blocked" in their accounts, and deducted only after shares have been allotted.
This would be a pre-requisite for moving away from physical IPO applications to a purely online system, and will also cut down the overall time-frame for an IPO. “ASBA needs to be made available beyond the top cities and all brokers connected to the stock exchange mechanism should be told to offer it mandatorily. All bank branches should also be equipped with ASBA," said an investment banker who did not wish to be named.
Another proposal made by investment bankers to Sebi is to increase the portion reserved for qualified institutional buyers (QIBs) in IPOs, to 60% from the current 50% of the issue size. Further, it has been suggested to increase the anchor investor quota to 60% of the QIB basket from the current 30%. QIBs include banks, financial institutions, state finance corporations, venture funds and just about any other entity considered sophisticated enough to understand and operate in markets.
“The idea is to provide a larger room to institutional investors in the price discovery mechanism," said a third person.
Bankers also want Sebi to make insurance companies eligible to bid for the 5% quota reserved for mutual funds, and allow retail investors to be allotted shares at a discount of 10% to the issue price, the third person added. He too did not wish to be identified.
A formal list of these suggestions is likely to be submitted by bankers to Sebi in the coming weeks, following which the regulator will put out a discussion paper by July. “Sebi as a regulator cannot create investor demand for IPOs. Primary market tends to follow secondary market, which in turn follows the state of economy. However, by changing norms, Sebi can indeed facilitate a smoother IPO process to encourage firms to get listed," Haldea added.