SEBI WAKES UP - WILL PRIMARY MARKETS WAKE UP TOO?

By Ruma Dubey

Finally a level playing field. It took SEBI a long time, really a long time, to do this but better late than never.

Like the private sector listed companies, public sector units (PSUs) also now have to toe the line – bring down the Govt holding to 75% or look at it the other way, public holding should be 25%. Prior to this, the minimum public shareholding for PSUs was just 10% and bringing all of them into this 25% common bracket, SEBI has done a very good deed. There are some 36 PSU where Govt owns more than 75% - in MMTC, Neyvelli Lignite, NCF, HMT and STC, Govt of India holds 90%; in Coal India the stake is 89.65%, a 80% stake in RCF and many more such listed companies where compliance to SEBI’s rule will become mandatory. These PSUs will be given a three year time frame to achieve 25% minimum public shareholding.

Apart from creating that much needed level playing field, it will help the Govt raise the much needed precious funds. This 25% threshold is expected to help the company raise around Rs.60,000 crore from these 36 companies, at current market valuations. Surely over the next three years could mean much higher valuations. And maybe much to the chagrin of the Govt, there will be more voices of dissent when it tries to arm twist the PSUs into doing things which financially make no sense, like the recent diktat of high interim dividend payment. India is no longer a socialist country; we may not like to hear it but we are more capitalist as that is the need of the circumstances in the country today. So then why are we making this pretense of hugging close to our chest legacies of the socialist past?

This PSU move apart, SEBI announced another very important measure - the minimum dilution to public in an IPO shall be 25% or Rs.400 crore, whichever is lower, for companies with post capitalization of less than Rs.4,000 crore. Actually, this was an aberration which SEBI has now corrected – in that sense it is not a ‘new’ rule. What this means is that companies which have say, Rs.3900 crore market cap was forced to dilute around Rs.1000 crore while another company, whose market cap was Rs.4000 crore, could get away with dilution of just Rs.400 crore.

And what happens if the ‘whichever is lower’ choice comes at Rs.400 crore IPO but equity dilution stake is lesser than 25%. For a change, SEBI has thought this out well – it has said that in such cases, the company will continue to be mandated for the 25% minimum shareholding norm, only it has the liberty to do so within three years of listing. This is expected to encourage scores of small companies which are now forced to seek funding from PE players, who can now come directly to the market.

This move alone, many say is expected to wake up the comatose IPO markets. While addressing the Press a few days ago, it was quite disheartening to hear Mr.Sinha, SEBI chief said that in the last three years, over 60,000 intentions by corporations to go to the market have been dropped and prospectuses were allowed to lapse. Thus in one correction of an anomaly, not only has SEBI helped the IPO markets but all the ancillaries around it will also have business – brokers, bankers, merchant bankers, advertisers; the entire financial sector.

These two moves apart, listed below are some of the other measures announced by SEBI yesterday:

• Increase in anchor investor’s bucket to 60% from the current requirement of 30% of the institutional bucket.
• Approved a proposal to permit bonus shares issued in last one year, prior to filing of the draft offer document, to be offloaded through OFS, if such bonus shares were issued out of the free reserves or share premium of the company.
• To better retail investor participation in Offer for Sale (OFS), SEBI proposed to stipulate a minimum 10% of the OFS issue size to be reserved for retail investors, those who bid for amounts less than Rs.2 lakh. If 10% is not subscribed, the unutilized portion may be offered to other investors.
• Allowed sellers of shares in OFS to offer a discount to retail investors.
• To ensure better liquidity for markets and attract serious investors in listed firms, SEBI allowed non-promoter shareholders holding more than 10% to use OFS to divest their stake. Till date, only promoters are allowed to do so.
• It gave the nod to top 200 companies by market cap from the present 100 top companies to use OFS route.
• All research analysts will have to register with SEBI before they can make stock recommendations. The disclosure requirement for research analysts will be much stricter to avoid conflict of interest.
• Allowed more flexibility to India Inc in rewarding their staff by again allowing companies to issue employee stock ownership plans (esops) through secondary-market purchases but very strict caveats.
• SEBI has proposed that the pricing of shares for preferential issues and qualified institutional placements (QIPs) to be based on ‘volume-weighted average price’ (VWAP), instead of closing prices – this is expected to eliminate outlier effects and give a more accurate determinant of price.

All in all, all these are some very progressive measures proposed by SEBI. It will not only revive the IPO markets, help the Govt raise around Rs.60,000 crore but will remove all the existing anomalies. It’s a good move and one hopes that companies to start taking steps to adopt these measures and make the markets robust and more transparent, deeper.