OFS: Some cos got around Sebi minimum public holding rule

Santosh Nair
Moneycontrol.com

The June deadline for complying with the Sebi rule on minimum 25 percent public shareholding is at hand, and on paper, and a good number of companies have reduced promoter holding to 75 percent.

But the reality may be somewhat different, going by the talk in broking circles.

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Under pressure to comply with the Sebi rule on minimum public shareholding, promoters of some companies have transferred a part of their holdings to entities controlled by them, under the garb of the offer-for-sale (OFS) process.

"Promoters approach a friendly merchant banker, and ask it to find buyers with whom they can park the shares for a while," said a market participant familiar with such deals.

"The promoter will arrange the funding for the purchase, and the shares will be bought back through some dummy companies at a later date. Or the promoter may buy the shares in the OFS through one of his many unofficial accounts," the person said.

In May alone, over USD 1.5 billion of share issues hit the market as promoters rushed to meet the Sebi deadline.

The healthy demand for the shares of some companies comes as a surprise when the stocks have been floundering in the secondary market.

And while foreign fund flows so far this calendar have been robust, investors have mostly steered clear from mid and small cap companies owing to weak fundamentals and corporate governance issues.

A few companies have been honest enough to admit that there have been no bidders in the OFS. (The Mint newspaper estimates that at least 80 companies are set to miss the June deadline) But for many others, poor response for the OFS would have undermined sentiment for the stock. Hence nearly all the OFS have been fully subscribed, even if just about.

In some instances, promoters have used the OFS to their advantage by ramping up the price of their stock in the secondary market ahead of the share sale, and making a quick buck on shares held in unofficial accounts.

The pricing of some of the issues also raises eyebrows. One small cap real estate firm priced its OFS at twice the prevailing market price, and that too when it is hardly traded in the secondary market. A holding company’s OFS was fully subscribed at many multiples the market price. Many thinly traded penny stocks saw good demand for their OFS, despite negligible interest in the secondary market.

One 'successful' OFS was for a stock which has not been traded on the exchanges for some time now.

In short, a handful of companies may have complied with the Sebi rule in letter, but not necessarily in spirit.