Govt can hit divestment goal with new OFS norm: Kotak Invst

Hoping to make the process of disinvestment even smoother, Sebi has relaxed norms for governing offer for sale (OFS) and institutional placement programme (IPP).

IPP and OFS are the two new share sale tools introduced by the regulator in January this year, especially to help corporates increase their public float. Also Read: SEBI tweaks norms for OFS, IPP
V Jayasankar of Kotak Investment Banking is happy with the changes the market regulator has made which will give large and smallcap companies a huge leg up. The regulator has decided to relax the mandatory 12-week time gap requirement between two consecutive OFS or IPP.
He sees these renewed OFS norms providing a lot of flexibility to promoters and issuers which will in turn entice companies with lower margins to step in and participate. Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying videos for complete details. Q: In your view what has changed in the OFS norms? Can we see more appetite coming in now?
A: The big picture is a lot of flexibility has been provided to the issuers and the promoters as far as the OFS is concerned. At the same time it has also increased investor friendliness. There are four significant changes in the review of the OFS that was declared by the SEBI board yesterday. First is the demand issue that they have addressed and this applies to both small companies as well as large companies for e.g. if a company’s marketcap is more than Rs 1 lakh crore earlier the OFS guideline talked about at least 1% being offered.
I think today the promoters have the option of right sizing the issue, further they have also given the option of, off scaling the base issue size. Therefore you can technically split the overall issue size into a base issue size plus a green shoe option and with a minimum issue size of Rs 25 crore it gives huge flexibility to both the large and the small marketcap companies.
For e.g. for companies less than Rs 2,500 crore - earlier the guideline talked about at least 10% being offered which means if the marketcap is about Rs 2,000 crore, Rs 200 crore has to be offered, which could have been a little large for a company of that marketcap and the demand could have been little lesser somewhere at about Rs 100 crore. Today companies can do in two tranches as being forced to doing it in one tranche. So the demand issue has been well addressed in the recent review.
Second, the timing and the pricing risk has also been very well addressed because now you can announce the price, not on T-2 and make the announcement but on T-1 after the closure of the stock exchanges. So, essentially the issuers run the risk only on the trading day as compared to two days of risk.
Third, they have reduced the margin money which they will have to come out. It’s going to be an ad hoc margin so we do not know what the percentages are but should it chose a price priority then the appetite for investors to participate will be higher because we have a 20-30% margin and on price priority you run the risk that you put in a bid you do not get any allocation.
With lower margin you are enticing investors to probably come and participate which a 100% margin would have deterred investors. So this is very useful especially in case of price priority or wherever you find the issues going to be heavily oversubscribed because in a proportionate case you have 100% locked in and you know you are going to get only a fraction. The final one is the time gap; today you can do it with a gap of just two weeks. Q: Increasing the time limit over which you cannot change your bids, from 30 minutes to the last one hour, is that significant? Was that the key reason why we had that fiasco for ONGC?
A: I do not think that is going to make a big difference going forward because investors have learned the rules of OFS. Looking forward, what will happen is investors realise that you cannot change the bid in the last one hour, you cannot change the bid in case you go for a lower margin. So if the margin save X percent and institutional investors come in with X percent margin you cannot change the bid at all.
What it means is most of the bids will come towards the end. So you are going to see a situation where if we have trading open from 10 am to 3:30 pm and nothing happens till 2:30 pm, all the action will start after 20:30 pm because you cannot change the bid even once if you go for a lower margin.
Q: Focusing on the possible appetite because since the OFS and IPP were announced we had around five issuances - Wipro, ONGC, DB Corp etc. From the government stable with regards to the divestment target, how much of an increased appetite and exponential or incremental increase can we see now going forward with this new rule?
A: As I said a lot of flexibility has been provided to issuers, promoters - in this case the government as far as the size or time gap is concerned. So the ball is in the court of the government, they have already announced in the budget proposal a certain amount to be raised in disinvestment programme. You have clearly another nine months available. So I would assume that they will start taking necessary steps to implement that budget proposal. Q: Have they sounded you all out for anything either in the offer for sale category or in an outright IPO public issue? We understand that you all have been sounded for ONGC Videsh?
A: The review has come up only yesterday and these are some of the points which all the stakeholders, i.e. bankers, stock exchanges, Sebi, government, other private sector companies all have been putting forward and many of the changes have been accepted, a lot of constraints have been removed from the OFS programme. So since this happened only yesterday and we have to still wait for the fine print, give us some time and I think we will have a better picture.
_PAGEBREAK_ Q: Has your company been sounded out by the government for any of its IPOs or disinvestment programmes? How much can we expect at all in the first half or it will be nothing in the first half and only inthe second half?
A: Discussions always happen with government and unless there is any announcement from their side, it is not possible for me to share. So this question is best addressed to the Department of Disinvestment (DoD). Q: What is happening in terms of fundraising by companies? How exactly is the sentiment panning out now because we haven’t heard of many qualified institutional placements (QIPs) happening. Even the initial public offer (IPO) market has dried up in terms of big bang issuances.
A: There are strong headwinds in the equity capital market. There have been probably four-five IPOs in the current year that had happened. We did the Speciality Restaurants’ IPO recently and that traded well. It has probably traded up about 30-35% from the issue price. We hope that this will slowly make some of the companies sit up and try and do transactions.
I think at this point in time, there is an appetite for companies from broadly the consumption, banking and the NBFC space or companies with strong corporate governance and good track record of having given good positive returns since IPO. So it is going to be a lot more limited set of companies that perhaps will plan either an IPO or QIP.
The entire IPO process takes at least nine-ten months. So you will see the IPO process probably being revived towards its fag end and it is too early to predict whether there will be too many IPOs coming in, there will be a limited set of issues on the IPO front. QIPs because these are short-term products, you can probably do a transaction in a matter of 45-50 days.
You probably may see some more issuers looking at QIP for the sheer reason that you are going to see pockets of window being open, you are not going to see a continuous timeline where a company can plan an issue but you will find pockets of inflows and you will see some companies doing a few QIPs even there. So QIP market will be a lot more open than IPOs but issuances will be limited. Q: On the market, are you seeing more likelihood of upsides and if yes, how much another 10-20%? What can this market give in 2012?
A: The downside seems to be probably reasonably well protected because you can probably argue for another 5% downside but on the upside it is all a function of what the government does in the next few weeks. There are a lot of expectations that there will be at least some moments going forward with the presidential elections being out of the way by July 19. So expectations from investors will continue. At this point, investors are pricing in many of the negative news and unless there are positive news as catalysts, it will take some time for the market to move up.