3 New Ways of Selling Down!

The New Year has brought 3 new mechanisms- 2 that help companies and their promoters to meet the minimum 25% public shareholding limit and the third helps the majority shareholder have more shares accepted in a buyback.

The moves have quite clearly been prompted by the government's desperate need to raise disinvestment revenues in a hostile market.

Today we examine if these mechanisms will benefit all companies, at least those eligible, and at what cost? Joining me to do that S Ramesh of Kotak and Sandeep Bhagat of S&R Associates.

The first method is acronymed IPP or Institutional Placement Programme available only to companies where promoter stake is higher than 75%. The IPP can be used to increase public shareholding by up to 10% either via a fresh issue of capital or via the promoters selling down.

Key features:

A prospectus has to be filed.
It's only open only to be qualified institutional buyers.
There has to be a minimum 10 allottees.
25% of the issue will be reserved for mutual funds and insurance companies.
No investor can be allotted more than a fourth of the issue.

The indicative floor price or price band has to be announced a day prior to the issue opening.

The allotment will have to be on a price priority, proportionate or pre-fixed criteria basis and that must be disclosed in advance.

Doshi: Clearly, this new route adds to the number of options that are otherwise available to companies to raise money or for promoters to sell down. So compare this with the QIP which companies can also use to raise money and this clearly gives you more current pricing and a faster process than even the QIP.

Compare this to the FPO and its miles ahead. Compare this to any other process that is available for promoters to sell down and again it seems like it could give you a price advantage so to speak or depending on where the demand for your shares lies it could allow you to speak to a larger universe of institutional investors. How do you see the addition of this option?

Ramesh: We did a quick analysis of the companies or the list of companies that could get impacted- so here is the statistics for that- about 250 companies which are currently, what we call as non-compliant, with the 75% on the SCRR rule. If I keep out the PSUs which are 10 or 15 in number, plus if you look at the OFS which is the offer for sale which they also allow for the top 100 market cap companies.
 
Doshi: That's the auction process which we will come to in a bit.

Ramesh: Correct. So the quick summary is in a nutshell about 325-350 companies that can avail of this. We also did a further cut on market cap and if I take market cap of USD 500 million as indication, there are at least 40-45 companies without the government companies which can technically benefit out of this. So therefore I think this is a good progressive and proactive measure.

Doshi: Available to a universe of about 300 companies.

Ramesh: Correct. If I have to go to the next level of screening I would just like to start by saying that actually the IPP should be compared or contrasted with the FPO and not so much with the QIP because in a way they are mutually exclusive.

Doshi: Why do you say that because to me and this is the rough comparison I did. The IPP versus the FPO. The IPP has a slimmer prospectus, substantially faster process compared to an FPO, far more pricing currency or current pricing so to speak. The only disadvantage if you want to call it that way is that only institutional investors get to participate in an IPP versus an FPO which is open to a wider universe of investors. You compare the IPP to a QIP you have got pricing which is more current than even the QIP which has a two week average.

You have got an unlimited number of investors in the IPP whereas QIP is capped at 49%, all institutional, but capped at 49%. The only disadvantage between the IPP and the QIP is that you have got to file a prospectus at least three days in advance in the IPP whereas in the QIP you can literally do things within hours. Therefore since you have to file in advance, there are upfront disclosures required including in allotment etc. that takes away a minor element of surprise maybe is how I thought it to be.

Ramesh: All the market participants at their respective places have done analysis of how will the process work and while the intention is to file a prospectus with ROC, our judgement is that this will be almost mirroring a QIP document which is world class, but at the same time abridged quick and fast. Therefore, this process of ROC filing in three days are stuff which are minor tweaking. But I don't think they take away.

Doshi: It's minor. I qualify it is minor. But why did you say they are mutually exclusive, because to me the IPP and Sandip please come in here because you are very silent, the IPP is a sort of a more advanced contemporary version of the QIP because it gives you far more contemporary, current pricing and it takes away the limit on the number of investors. So I couldn't understand why they couldn't achieve the same thing by amending QIP rules as opposed to having to introduce a whole new product in its place or a whole new mechanism in its place?
 
Bhagat: Look, the minimum public float was introduced in June 2010. At that point, people said you have been given three years, so till June 2013. It's been a year and a half. There have been companies who are finding it difficult to raise money through a prospectus through the two or three means permitted under the listing agreement. So this is the way of the regulator to respond and say okay, we will help you reach that particular minimum public float.

Doshi: And you couldn't use QIP to reduce?

Bhagat: You can't use the QIP.

Doshi: The key thing here is that you can't use a QIP to meet SCRR where as now you can use an IPP to meet an SCRR and those who can use QIPs can't use IPPs if they have already met with the SCRR.

Bhagat: Correct. I think maybe over time, depending upon how this particular program goes through and depending upon its success or not, there maybe a convergence of these two. But at the moment, the advantages are you can do a secondary sale and offer for sale can happen through an IPP. QIP is only a fresh issue. As you said, you can sell it to an unlimited number of institutional investors. I think this is a regulator's response to a particular issue which is try and meet your 25% float.

Doshi: I agree. It can't be a bad thing. You have increased the number of options for companies to be able to comply with a rule that you set out in 2010.

Ramesh: Additionally, adding the fact that through this route, like the FPO, we can also raise primary money which I think is a good feature.

Doshi: And that will be something that companies can- so you can use fresh capital through the IPP route. Why not equalize because companies that are not in compliance with the SCRR have now been given a mechanism that gives you more contemporary pricing, more current pricing, that takes away the cap on the number of investors.

But the two benefits are not available to those companies that are already in compliance but have to go down the QIP route. So I couldn't understand why you are making all of this available to those companies who need to be in compliance but won't make it available to a whole larger universe of companies out there who also need to raise money for other reasons.

Ramesh: First when you are using this word 'non-compliance' or 'compliance', we must keep in mind that technically all have time till June 30th. Having said that, I think the way I would sort of rationalize or present this is - there is a QIP framework that has been in the country for the four-five years. It has been an immensely popular product- non-withstanding views that we all as market participants have always presented- in a falling market there are challenges of pricing.

But having said that, it was a great evolution and it has done well. So I think, as Sandeep rightly put it, that's the takeaway I would have that look, they don't want that disturbed just now. I think there is a second set of option being given to these companies. I think we will have to see when markets get little better, then issuers go to the market- how the IPP or the OFS works out. On back of that, I think we have always found the regulator proactive to suggestions to see whether there should be convergence, what tweaking is needed. I think we should not be judgemental. We should allow a few issuances to happen.

Doshi: All right that brings me to the second mechanism that we wanted to discuss and that is the offer for sale of shares through stock exchanges. Now it's an auction process of sorts which can be used only by promoters to sell down to 75% or it can also be used by promoters of top 100 companies by market capitalization even if they are in compliance with the SCRR. Shares worth at least Rs 25 crore must be on offer in this on exchange mechanism, no pricing guidelines have been specified but bidders need to put up 100% cash margins and allotment will be on a price priority or clearing price basis proportionately is what the press release says.

Ramesh a promoter can currently sell down by getting prior approval from the stock exchange and selling in the open market. How does this auction process offer him an improvement or a better way of being able to sell?

Ramesh: Currently, if you look at the block window, there are timing restrictions on how a block trade can be executed. There are currently limits of plus - minus 1% to the last traded price and there is a mechanism which the stock exchange lays down for doing these block trades. 2-3 clear things outweigh the auction process as having advantages over what we have today. First is, for large sales where the promoters want to do large sales in terms of a big size, by giving a separate window, it almost mirrors like a primary issuance allotment process - so I think that is superior.

Doshi: You wouldn't be able to do the large sale on the regular...

Ramesh: Or you are uncertain. Second is that if a promoter has decided that he wants to do a certain quantum, the big advantage I see is he does it in one shot. There is no overhang, you are not doing it in bits and pieces which is always good for the existing shareholders and the stock.

And third, from the investors' point of view by having the stock exchange involved and having either price priority or proportion, I do think that it is of big comfort to the investor that if he puts in money, then either a proportionate system will be followed or a price prioritization will be followed which currently may not necessarily be the way it can get done in a block trade.

Bhagat: I have 3-4 questions which are hopefully answered. To what extent can you do marketing of this particular transaction? Can you go and meet any kind of investor you need?

Doshi: So how do you publicize this?

Bhagat: How do you publicize it- even for marketing activities, are you able to target retail, are you able to target HNI? You don't have a document today? Is this a valid private placement? Are you limited to 49 people only or is it a public offering? Those are the couple of issues.

Doshi: So because there is no document in this and therefore it should be a private placement and if it is a private placement, then you would be restricted to allocating only to 49 investors and if that is the case, then you cannot market the issue. Those are the concerns that you want clarified?

Bhagat: I think the issue is private placement versus public offering. Are you somehow, by this mechanism, tripping the private placement exemption or not?
Doshi: Let me put it this way- suppose they say that it's alright, we allow you to allocate to more than 49, we consider this to be a public offer and not a private placement but we are doing away with the need for a prospectus because it is after all the promoter selling down, it's not the company raising any more money etc. Would you be comfortable with it?

Bhagat: I don't think I know how they would get comfortable with because if you conclude it's a public offering, then you are getting back into the whole

Ramesh: If I just keep the technical issue outside

Doshi: But you can't because this is

Ramesh: The point I am trying to make is that if today, an existing retail, institutional, high net worth investor is going to buy the same stock on the market, he is getting a set of standard disclosures which are public information. So that's the basic principle on the key.

Doshi: If because of this technicality, they would have had to restrict or they will have to restrict the number of people who can participate or who would get shares in such an offer for sale and auction to 49, then do you still see this as being hugely beneficial or more advantageous than the current route available to promoters which is you can sell on exchange except that large volumes, limited time period.

Ramesh: I would like to see how the guidelines come out- all of us are being a little presumptuous to see the guidelines but if a higher number of investor or a larger universe of investors is available, it's always better as you look at large size transactions. 

Doshi: Can we compare this auction process to say an FPO?

Bhagat: FPO is permitted today; a promoter can sell through a prospective...

Doshi: So this is hugely advantageous over an FPO?

Bhagat: Yes because there is no document required, the time lag is minimal and it can be done at a fairly lower cost.
 
Doshi: And it is more advantageous versus an IPP as well?

Kotak: The other point I wanted to add is that this also allows all classes of investors to participate. It doesn't cut away any investor class.

Doshi: So that is one of the advantages it has over an IPP and this is equal to what it has compared to an FPO- an FPO would allow the same thing and the other advantage it has over an IPP is that it is a faster process than even the IPP and depending on how the pricing works out, that could also be a big advantage over the FPO- faster process and pricing.

Bhagat: Yes correct, we need to see how pricing is, when they talk about pricing or clearing price basis we need to kind of  understand how exactly that works. They would want to know, with reasonable surety, that if they are putting up a 100% margin, where are they in terms of allocation? Is there going to be leakage which they are currently in a bulk trade?

Doshi: The only place it doesn't score over an FPO is the 5% discount?

Kotak: That is correct but if you look at an FPO participation, the retail investors -the quantum of participation.....

Doshi: What would you like the price band to be for this auction process to be best used? How wide can it be if its going to run parallely with the market- I mean the bulk window is 1% plus or minus- this has to offer you a wider range than that to score over that process?

Bhagat: Yes, this should because I think ultimately if you are selling a large number of shares and  it's a reasonably large sized transaction, you are looking at the last traded price as some kind of benchmark, you are trying to attract new investors- it means they may want to discount to the current trade price. A 1% discount may not be enough, they may want a higher discount but you still think its ok for you as the seller. So I think there should be some flexibility in pricing even in the auction method so that you can attract maximum demand.

Doshi: I want talk about the change in the buyback route whereby the key change is that the majority shareholder, whoever it may be, whether government or non-government will be entitled to have more of his shares accepted in a buyback because that's the ratio at which its going to work here onwards. The only question that comes up to me is it seems fair on the face of it- if you own more of that company, you should be able to participate more in the buyback but some might call it anti-minority. Again this is one way that SEBI has facilitated the government's ability to participate more if PSU companies go through with buybacks?

Bhagat: I am not too sure that is entirely correct. I think, if I am a minority shareholder, even under the current process today, if I tender in a high amount, I may be scaled back less than what I own as a percentage of the company. So depending upon the math, depending upon how many shares you are tendering etc I am not too sure that it always works out to be a minority deterrent.

Kotak: Simple way, if I can say, rights issues and buybacks are two opposite sides of the same coin. So if you look at the existing framework on rights, this is one important feature that it is always proportion to your holdings. So in a way they are bringing it back to the buyback.