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