Tweaking OFS norms will bring transparency and draw more investors
Jan 20 2013, 2109
Over the past 15 months or so, the Securities and Exchange Board of India (SEBI) has taken its job very seriously, bringing in several amendments and reforms that have improved the functioning and transparency of both the secondary and primary markets. Over a period of time, these efforts should expand the Indian equity market at a much faster pace. The reason why we are using the word “reform” is that existing laws can be amended with an objective of rectifying past mistakes or plugging certain loopholes, but a reform is done with the objective of making a law better and more transparent to bring in greater efficiency. Sebi’s recent move to tweak norms for offer for sale (OFS) must be counted among the “reform” measures that it has initiated in the recent past. In a short span of time, the way OFS mechanism has caught the fancy of the Indian market, is not a small achievement. It is a simple method bringing transparency, both for bidders of stocks and promoters offering shares through OFS, in the process, removing a number of hurdles companies faced in reducing promoter stake either to meet Sebi’s norm of minimum public shareholding or for raising of funds from the market. The cost and time elements of an OFS are much lower and better compared with earlier methods available to promoters for diluting their stakeholding. The success of the OFS route is clearly visible from the fact that a number of foreign companies have decided to stay listed in India, instead of taking the delisting route in order to meet Sebi’s June deadline on listing agreement. This means Indian investors can stay invested in these companies and enjoy the fruits of their growth. This would not have been possible had these companies delisted from the market because the OFS mechanism was unavailable in India. Simplifying rules and bringing transparency will help develop OFS as a new and vibrant segment of the Indian capital market. In the immediate short term, such simplification will help the government’s divestment programme over the next few months, the success of which is essential to improve the macroeconomic climate. Exempting institutional investors from making upfront margin payment while participating in an offer for sale will draw more investors to an OFS, which is a must for better price discovery, especially in large offers from the government stable. This was also required, as payment of upfront margin increased the cost of participating in an OFS, and for institutional investors, every penny counts. Moreover, given the current volatility in currency markets, foreign institutional investors (FII) were exposed to unnecessary currency risks. It will now be possible to avoid losses on account of a change in value of the rupee due to adverse short-term currency movements between the time the margin was paid and the time when refund was received by an FII. While allowing this relief, the caveat that the institutional bidder can only increase his bid price and not reduce the price or quantity, if upfront margin was not paid, would ensure that non-serious bidders stay out of the OFS process, in the process, protecting the integrity of the bidding process. Meanwhile, the mandatory disclosure of indicative offer price during the period of offer will help investors take more informed decisions. It is highly likely that investors would be induced to bid for more shares when they know the pricing strategy.