Last month SEBI introduced two new methods of stake dilution by promoters holding more than the stipulated 75%. Institutional Placement Process (IPP) is an accelerated QIP of sorts but allowing for more institutional participation and promoter selling down cannot use the QIP route; hence IPP is a new option. The Offer for Sale (OFS) is an on-exchange auction open to all investors. Both these moves were prompted by the governments urgent need to disinvest PSU holdings and the first off the block is most likely going to be ONGC but promoters of private companies are also keen to avail of these new methods and so today we go into more detail on how they will work with Bhavna Thakur of Citibank, Ajay Vaidya of Kotak Mahindra Capital and Prithvi Haldea of Prime Database.
Doshi: I am going to skip IPP because it's mostly oriented or entirely oriented towards institutional investors, very akin to QIP, accelerated though and just offers one new route for promoters outside of the FPO to be able to go out there and dilute their stakes considering that the block deal is now off the table.
Thakur: And also for companies.
Doshi: Also for Companies. The more interesting, exciting new animal on the block is the auction or OFS method and I want to outline some of the key highlights of this method. It can be used only by promoters to sell down to 75% or by promoters of top 100 companies by market capitalization if they are already in compliance with the SCRR. Shares worth at least Rs 25 crore must be on offer. No pricing guidelines have been specified but bidders need to put up 100% cash margin and allotment will be on a price priority or clearing price basis proportionately. Those are the broad guidelines from what I understand it.
First question to Ajay, how will this process work? Look at it from the retail investor point of view. I am Mr. X who invests in the equity markets and I want to know how this auction process will work. I have just read off the exchange notice that XYZ company is about to do an auction of its promoters shares day after tomorrow. What do I need to do?
Vaidya: It's actually exactly like any stock exchange trade but only think what SEBI wanted was a more broad-based participation in particularly sell downs when you have minimum public float is what has to be. So I don't see too much. The short answer is you go to your broker, you know there is a time, and you place your order...(interrupted)
Thakur: First what retail investors has to do is make sure that they have their brokerage accounts in place and that their brokerage accounts are active to be able to trade. Simplest thing to do because in FPO or any other format you have a DEMAT account and you have an application form. You would only set up a brokerage account at a point you want to sell.
Doshi: So those are the first very simple steps. How are they going to know how to participate in this auction and what I mean is how will they determine what price to put in their bids at? Because retail investors don't necessarily take part in any kind of auction otherwise. So how do they know what price they need to put in their bid at?
Vaidya: These are listed stocks; there is a price for all these stocks available in the market. So the price discovery is there in the market today. So it's not going to be very difficult. There are two options which you can use in this. One you can announce a floor price, two you need not and you can keep it absolutely confidential which even the selling broker will not know the price.
Doshi: But if there is no floor price, then what happens? How does an investor gauge what price he needs to put?
Thakur: Then again you are looking at de-trading analysis of what the stock has been trading at in the previous two weeks probably and the second thing you would look at is that every time the stock exchanges will be flashing where the book is getting built. In this case, there is not going to be a separation between a QIB book or retail or HNI book. But at regular intervals, you will understand where the book is getting built. So at that point you can do that. That is why from a retail investor perspective and even from an institutional investor perspective, it is better that the floor price is announced because of two reasons. One- of course they will have a better idea in terms of where they should be placing their bid and especially for retail that indication is important. The second part is bringing in of 100% margin money especially for foreign institutions when they are bringing in margin; an idea of the floor price is obviously helpful.
Doshi: Do you see most companies fixing or determining the price or most promoters determining the price that they want to sell at whether they announce it publically or not, at a discount to prevailing market price or at a premium? How are investors going to figure out whether in such a sale, because it is a promoter coming to a market to dilute, it is a large chunk of shares, so one could even anticipate that this may be done at a slight discount or some could say this is a blue-chip company and it's your one time opportunity to be able to buy a large chunk. It could even be at a premium. How do I know as an investor whether this is going to be a discount or a premium? How close I need to be to the market price on which side?
Vaidya: We have been having follow-on offerings for a long time in India.
Doshi: But those come with a band right?
Vaidya: They come with a band but when you talk about pricing, they typically come at some discount.
Doshi: So in your answer, I am gauging, that most companies will be doing this at some discount?
Vaidya: If it's a liquid stock, you can get the same stock in the normal window. So there has to be some incentive to come here because you are getting it slightly cheaper.
Doshi: Is that what you agree with?
Thakur: I agree with that. You are getting it slightly cheaper and what you are paying for is the allocation that you are getting. This is to increase the public float. That means that the liquidity and the float will increase. So what you are coming and this is your real demand, you are coming in with real long only, kind of long term interest, in this company and therefore you would pay a certain price. So it's very difficult to say that if the floor price has been announced and in the one trading day that you have in the middle, the price falls. Only very serious investors will come in at that floor price if the price falls below the floor price and that could well happen because you have an event risk and a pricing risk in one trading day.
Doshi: So both of you believe that this will be at a discount to market price?
Thakur: Yes slight discount to market price.
Doshi: You have heard some of the modalities of how this auction process is going to take place. Look at it from the retail investor point of view and tell me what you make of what you hear, what kind of retail demand such a process will in fact garner?
Haldea: Unfortunately, I don't agree with whatever views have been expressed till now. The follow on public offer route failed primarily because you have to make an FPO at a discount to the current market price and it was substantially an arbitrage opportunity and when the price was volatile, the market was volatile and the difference between the offer price and the market price became too narrow, you found that there were no takers for FPO and ultimately FPO had to be dumped on institutional investors which are in-house kind of investors. The whole idea of stock exchange mechanism is not to sell at a discount. It would be a shame in case we were to announce floor price and then let everybody converge around the floor price. I think the whole idea of auction should be to discover a price much higher than the current market price. I believe that there are long-term investors who would like to buy large quantities of shares of a given stock which they cannot buy from the market without disturbing the price substantially and this method actually offers them an opportunity to place large orders at a price that they are willing to pay and therefore get an allotment, not on a proportionate basis but on a price priority basis. I think this instrument is not designed for the retail investor, let us not fool ourselves. This is an institutional mechanism; retail will have no method of making a bid in thin air. He does not know what price he should bid at and in case, it is a price priority basis, then he has no chance of allotment. He would probably stay out of this. This should be aimed at an institutional investor and I think we have an example of Maruti's auction which took place few years ago where institutional investors bid much higher than the market price. If you have to mark it to the market or give it at a discount, then you have the FPO route which is available and which is not...(Interrupted)
Doshi: You have made several points in that one answer. I am going to give Ajay and Bhavna the opportunity to respond to that?
Thakur: I don't disagree with Mr. Haldea at all. I am saying it's only the setting of the floor price that you have to think of and take the consideration on the price falling or not and on price priority basis- that's exactly what you are doing. You are going after the maximum price. So the person who bids the highest will get the highest allocation. I don't think it's a process for retail because there is no way for retail to have that much information or knowledge about the company.
Doshi: It's interesting you agree with Mr. Haldea and now respond to that and also respond to that in the context of the fact that this whole process was created as an extension of the disinvestment philosophy of reaching out to as many investors as possible. That's why you created auction otherwise you had IPP anyways; so what are you achieving then?
Vaidya: I think simultaneously with this we should know that SEBI has stopped selling down for minimum public holding sales through stock exchanges in any other manner. So clearly SEBI wanted a broad based investor base or retail...(Interrupted)
Thakur: But retail can participate.
Doshi: It can participate but if retail is going to find it too complicated to participate or if you feel that retail would participate only if the pricing was most likely a discount to the market price whereas this whole process should be to discover a premium then are you ruling out.
Vaidya: I would agree with Mr. Haldea to say that it could be at a premium but dependent on liquidity of the stock.
Haldea: I am happy that they are agreeing to the point that it's not a retail product. It can still be converted into a retail product and one of the suggestions I made is that you can have 75% of the offer which is entirely done through the auction method and then whatever the floor price that has been submitted in a sealed envelop- that's the price which is acceptable to the issuer. At that price or even at a discount to that price, you have 25% allocated to retail investors who are putting applications or bids for Rs 2 lakh or less because...(Interrupted)
Doshi: But you are now asking for a modification to the existing guidelines. This does not exist within the current guidelines that have been put out?
Haldea: Yes.
Doshi: I mean this was already done in quite a bit of a hurry and now you are saying let's change this also quickly?
Haldea: Since you have brought in the retail element because I have been saying that this so-called disinvestment programme is designed to deepen and broaden the capital market to get retail investors. We have the manifesto saying every household should own a PSU share. But when it comes to actually policy implementation, we have designed a product which is not for retail investor. This is a product which should fetch a premium to the company or to the seller and therefore the floor price should not be disclosed. It should be in as sealed cover. Let the investor - these are all intelligent investors who know the stock, the stock has been traded well, there is enough history of the company and let them take a call on the price at which they are willing to buy x quantity.
Doshi: Are you concerned about what impact this auction window, whether it runs for the full day or for half an hour, will have on the prices in a regulator trading market?
Haldea: My suggestion was and I think there is a concern there that the book should have been closed. We are talking to institutional investors and they better know what price they want the stock at. They should not be influenced by how the other people are making bids but the fact is that we are going to have an indicative price coming on the screen and therefore it should impact the trade in the secondary market because in case...(Interrupted)
Doshi: I am going to add to the challenges that this process faces and I don't mean this negatively, I am just trying to discuss them because this is a new process. So how easy or difficult is it going to be to market this given the legal grey area of this, in a sense, not having a prospectus therefore being considered a private placement. A private placement can only be marketed to what 49 investors or less. So how do you deal with the legal area of whether this is a private placement, is this a public offer and if it is a private placement, can you go out there and market it and if you can't market it are you further the killing the chance of being able to reach out to the retail guys?
Thakur: One thing is very clear that this should not require extensive marketing because these are companies that should be well covered by research. These are companies that should be fairly liquid because that's why this OFS methodology has to be adopted.
Doshi: So when you say non-extensive, what do you mean?
Thakur: One is that you make a public announcement. After you made the public announcement, you could market to anybody. Remember the universe of the buy side broker is infinite. Any broker can call up any investor and say this announcement has been done.
Doshi: Does that not amount to marketing?
Thakur: No, the public announcement has already been made. There are two types of marketing. One- you market before a public announcement is made and two which should be some kind of pre-investor sounding. But I am saying in this situation there would be very limited pre-investor sounding or none possibly. I don't think the lawyers would let us do it.
Doshi: If you can't do pre-investor sounding, how are you going to discover what floor price you should put in, what will be the ideal price?
Thakur: That you discover through your time tested methods of looking at your benchmarking with peers, looking at your 52 week low and high, looking at your VWAP analysis where the most amount of volumes have traded, what price. So yes, that is a limitation. To discover your floor price is a limitation.
Doshi: It is a limitation and marketing cannot be extensive.
Thakur: No. I think from an Indian perspective, the regulator has blessed this.
Doshi: Ajay I have heard both points of view from the investment bankers I have spoken to that this has the blessing of the regulator, so whatever your legal grey area, I think this should be able to go through and we should be able to market it to a fair number of people given the fact that these are well known companies and the second point being that several lawyers are uncomfortable with this. Will the MCA look at this as a private placement; will they look at it as a public offer? Do you need any MCA involvement or authorization or certification in this? How do you traverse that terrain?
Vaidya: I think I keep on repeating that these are stock exchange trades. This is like any other stock exchange.
Doshi: So you can allot to more than 49. Can you market to more than 49?
Vaidya: It depends on what you mean by marketing. The restriction is on making an offer to more than 49. So as long as what you do is not an offer, you can go beyond 49. There can be non-deal road shows. There will be interaction between sales. So there are many channels to get feedback about this company and it is limited to 49 that's it.
Thakur: One thing I would want to mention is marketing to international investors in international jurisdictions without a prospectus.
Doshi: When the QFI regime actually becomes operational.
Thakur: When the QFI regime actually becomes operational, our biggest challenge is going to be that we may have to keep out international retail investors because many international jurisdictions require offerings to retail if this is considered an offering and the lawyers will opine on that. An offering to retail is to be done by registration in those countries.
Doshi: Since we are at the end of our time, please wrap up for me, based on what you think will be the key challenges that this process will face and where you see the success of this process?
Thakur: I actually think that this process is probably a very good move. To my mind, it's an accelerated FPO kind of thing. In fact, in this case, like an FPO you have 100% margin but you have settlement within T+2, the fastest settlement and in fact the stock exchanges are saying that the allocation will be done on that very day and the remaining margin can be released on that very day.
Doshi: Okay. Ajay?
Vaidya: I think the objective was very clear that you needed a broad base distribution of shares to have a minimum public float and this is a method which allows you to broad base. I think when we talk about institutions, there is another category which is a high net worth category which is a significant category and the retail, as SEBI sees, is only up to Rs 2 lakh. I am sure they are not unsophisticated.
Thakur: It depends on the company as well. If someone wants to own the stock, this is a huge opportunity for them to get that float.
