IPO-bound cos may get relief on float cap
Monday, 15 March 2010
MUMBAI, Mar 14 (Economic Times): The government may provide a temporary breather for companies that have already filed their draft prospectus with the capital market regulator from meeting the norm of a minimum public holding of 25 per cent in their companies.
According to people familiar with the development, the government is expected to soon notify changes to the Securities Contracts (Regulation) Rules, 1957, to make it mandatory for all listed firms to maintain a public shareholding base of 25 per cent at all times. The new rules are expected to come into force from April 1 this year.
The rules will specify that companies with a low public float will have to divest 5 per cent annually until they reach the public holding threshold of 25 per cent.
The government and Sebi are in talks for fixing a cut-off date for companies that have filed their red herring draft prospectus, based on which the implementation of the new rules will come into effect for such firms.
The finance ministry and Sebi are also discussing the issue of huge equity issuance by some of the state-owned firms when the new rules come into force. This is because these companies have a large capital base and even a small dilution could mean that the market may struggle to absorb the supply of paper.
While the proposed rules may benefit retail investors and reduce the scope for price manipulation, analysts said that it may be difficult to implement. A large number of companies where promoters hold more than 75 per cent, will now be forced to dilute their stakes in a phased manner to the public - an entity that includes the general public, portfolio investors and financial institutions.
The biggest challenge would be the enforcement of the new limit for existing listed companies. Any penal action against errant companies such as delisting, suspension and financial penalties will ultimately hurt small investors as well.
S Venkatraghavan, managing director, IDFC-SSKI Investment Banking, said, "This kind of dilution may be a difficult proposition if done at one go, while the staggered dilution of 5 per cent every year is still manageable for some companies depending on market capitalisation. For companies, which are already listed, this will be a painful exercise. It can be done either through offer for sale by promoters, diluting through fresh issue even if funds are not required or selling in the secondary market. All these modes are time consuming and costly."
The practice of having a minimum public holding for listed companies is prevalent globally. Almost 300 local companies have promoter holding in excess of 75 per cent, while a large number of them - both public and private companies are part of the benchmark index. According to one estimate the new public holding norms will result in equity issuances worth nearly Rs 2000 billion for companies to comply with the new stipulation.
Mr Venkatraghavan added that if the new rules leads to an oversupply of paper in the market without sufficient appetite and depth, it will have an adverse impact on the market.
The move to go in for a phased increase in public shareholding has come after representations by industry and investment bankers who have said that many companies may not need that much capital, and high floating may cap price appreciation.
Under the current rules, companies are required to go public with a minimum public holding of 25 per cent. However, if a company intends to go for a 10 per cent dilution, the issue size has to be minimum Rs 1000 million, provided they issue 0.2 million securities in IPO.
According to people familiar with the development, the government is expected to soon notify changes to the Securities Contracts (Regulation) Rules, 1957, to make it mandatory for all listed firms to maintain a public shareholding base of 25 per cent at all times. The new rules are expected to come into force from April 1 this year.
The rules will specify that companies with a low public float will have to divest 5 per cent annually until they reach the public holding threshold of 25 per cent.
The government and Sebi are in talks for fixing a cut-off date for companies that have filed their red herring draft prospectus, based on which the implementation of the new rules will come into effect for such firms.
The finance ministry and Sebi are also discussing the issue of huge equity issuance by some of the state-owned firms when the new rules come into force. This is because these companies have a large capital base and even a small dilution could mean that the market may struggle to absorb the supply of paper.
While the proposed rules may benefit retail investors and reduce the scope for price manipulation, analysts said that it may be difficult to implement. A large number of companies where promoters hold more than 75 per cent, will now be forced to dilute their stakes in a phased manner to the public - an entity that includes the general public, portfolio investors and financial institutions.
The biggest challenge would be the enforcement of the new limit for existing listed companies. Any penal action against errant companies such as delisting, suspension and financial penalties will ultimately hurt small investors as well.
S Venkatraghavan, managing director, IDFC-SSKI Investment Banking, said, "This kind of dilution may be a difficult proposition if done at one go, while the staggered dilution of 5 per cent every year is still manageable for some companies depending on market capitalisation. For companies, which are already listed, this will be a painful exercise. It can be done either through offer for sale by promoters, diluting through fresh issue even if funds are not required or selling in the secondary market. All these modes are time consuming and costly."
The practice of having a minimum public holding for listed companies is prevalent globally. Almost 300 local companies have promoter holding in excess of 75 per cent, while a large number of them - both public and private companies are part of the benchmark index. According to one estimate the new public holding norms will result in equity issuances worth nearly Rs 2000 billion for companies to comply with the new stipulation.
Mr Venkatraghavan added that if the new rules leads to an oversupply of paper in the market without sufficient appetite and depth, it will have an adverse impact on the market.
The move to go in for a phased increase in public shareholding has come after representations by industry and investment bankers who have said that many companies may not need that much capital, and high floating may cap price appreciation.
Under the current rules, companies are required to go public with a minimum public holding of 25 per cent. However, if a company intends to go for a 10 per cent dilution, the issue size has to be minimum Rs 1000 million, provided they issue 0.2 million securities in IPO.