Santosh Nairmoneycontrol.com
A section of players would have had a rough idea about the likely floor price for L&T Finance Holdings offer for sale (OFS) issue. Nothing else explains the 7 percent fall in L&T Finance Holdings shares on Thursday ahead of the company’s announcement of the floor price late in the evening.
L&T Finance shares closed at Rs 79.20 on Thursday after hitting a 52-week high of Rs 88.35 earlier in the session. The floor price for the OFS was set at Rs 70, a steep discount to the market price. The bidding process for the OFS is happening today.
By sheer coincidence, L&T Finance Holdings was included in the future and options (F&O) segment from Thursday, allowing traders with leveraged positions to maximize their profits by short selling the futures. This could also have aggravated the fall in the stock price, which had risen sharply a day before on announcement of the inclusion in the F&O segment.
L&T shares are down another 4 percent to Rs 76 today. The OFS is being done to reduce promoters stake in the company and comply with Sebi's minimum public shareholding rule.
On paper, the rule on disclosure of the floor price is strict.
"In case the seller chooses to disclose the floor price, the seller shall declare it after the close of trading hours and before the close of business hours of the exchanges on T-1 day else the seller shall give the floor price in a sealed envelope to designated stock exchange before the opening of the offer. (T day being the day of the offer for sale)," says the rule book on the BSE website.
But in practice, the market gets wind of the floor price much before it is formally announced.
When a company plans a book built share offering, merchant bankers sound out institutional investors to test the appetite for the issue. Fund managers give an indicative price at which they will bid for the stock. They even ask bankers about the bids of other fund houses.
The moment potential investors get an indication that it will be priced at a discount to market rates, many of them start short selling the futures of the stock even before the price is publicly announced at the end of the day.
Some may even sell their existing holdings in the company, and then buy an equivalent quantity at a lower price in the share issue.
Unlike in a QIP, where the issuer cannot quote a floor price below the two-week average price of the stock, there are no restrictions on the floor price in an OFS.
In 2009, when the market started rising sharply after a prolonged fall, many companies took advantage of the bullish mood to raise money through QIPs.
At that time too, stock prices would fall sharply hours before the floor price/price-range was disclosed to the exchanges.
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