Sebi eases IPO norms, exit options for PEs

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Minimum public holding in PSUs set at 25%

Sebi eases IPO norms, exit options for PEs
Capital market regulator Securities Exchange Board of India (Sebi) on Thursday recommended a slew of measures to boost the primary market segment, increase retail participation in offer for sales (OFS), and make regulatory requirements for public shareholding consistent across private and public sector undertakings.

The Sebi board that met here on Thursday has recommended raising the minimum public shareholding requirement in state-owned companies to 25 per cent from 10 per cent now. Compliance with this requirement will force the government to sell stake in 36 listed entities fetching it Rs 60,000 crore (at current market prices) over the next three years.

Sebi also announced new regulations for employee stock options (ESOPs), allowing companies to buy its shares from the secondary market to offer them to staff, subject to certain conditions.

Companies wanting to list on the market by issuing initial public offers with a post-issue market capitalisation of less than Rs 4,000 crore would now have to dilute a maximum of 25 per cent or Rs 400 crore, whichever is lower. So far, they were required to offload not less than 25 per cent of their post-issue marketcap. Companies with post issue marketcap of over Rs 4,000 crore were required to offload at least 10 per cent.

“This will remove the anomaly that a company just short of Rs 4,000 crore market capitalisation was required to dilute about Rs 1,000 crore, while another company at Rs 4,000 crore market capitalisation was required to dilute only Rs 400 crore,” Sebi said in a statement.

Sebi has also changed the norms for anchor investments. Accordingly, the maximum allowed limit for anchor investors in IPOs has been raised to 60 per cent for the institutional category from 30 per cent, at present.

Any non-promoter shareholder, who holds more than 10 per cent stake in a firm would be eligible to use OFS to pare stake. Promoters of the top 200 companies in terms of market capitalisation have been allowed to use the OFS mechanism against 100 at present.

In addition, a minimum of 10 per cent of the issue size would be reserved for retail investors. Retail investors are considered those whose bidding amount is less than Rs 2 lakh. In case this percentage is not fully utilised, the unutilised portion may be offered to other investors, the Sebi statement said.

The change in guidelines have come at the right time as the market is expected to remain bullish in the window of three years which Sebi has provided the government to reduce its holdings in state enterprises. This would make it easier for the government to offload its stake to retail shareholders rather forcing LIC and SBI to rescue PSU floats.

Sebi has also framed Sebi (Research Analyst) Regulation, 2014. The regulations seek to register individual research analysts and entities engaged in issuance of research reports or who makes 'buy/sell/hold’ recommendation of a security and makes recommendation on public offers.

The OFS route will help private equity players to offload their stake without depending on promoters. In the long term, this would help private equity players and may lead to bigger investments through this route.

“We believe increase in the minimum public shareholding norms in PSUs was the biggest announcement by Sebi on Thursday. It will reduce the discrimination in regulations between private firms and PSUs. The OFS norms are made more effective. The IPO market too will get a boost as the dilution requirement has been lowered,” said Sudip Bandyopadhyay, CEO and MD at Destimoney Securities.

Girish Nadkarni, MD at Motilal Oswal Investment Banking said, “The proposed changes in the IPO norms are extremely welcome. Raising the limit for anchor investors will provide them a larger book and lead to greater certainty for the issuer in terms of issue closure. Also, with the relaxation in the OFS rules, we would see more private equity funds using this facility to exit their holdings in a transparent manner.”

“On the whole, we will see a strong revival in the equity market across products,” he added.

By June 3, 2013, all private sector promoters, barring a handful, had pared their stakes to a maximum of 75 per cent, according to the minimum public shareholding norms for private players, using either OFS or IPP routes. Some even floated follow on public offers to lower their stake.

PSUs firms, on the other hand, were only required to shed their stakes to the maximum of 90 per cent by August 8, 2013. A higher level of government stake in the PSUs and resultant lower volumes, made trading in these stocks difficult.

Last year, MMTC came up with an OFS to offload nearly 10 per cent stake at a discount of 73 per cent to the prevailing price. This lead to its stock price crashing heavily. Investors were unable to estimate the fair value of the stock until the OFS was announced, as its free-float stock was very low. The stock that once traded at Rs 1,800 apiece in 2010, is hovering around Rs 97 apiece, at present.

MMTC, mining firm Nevyeli Lignite, Hindustan Copper and SBI associate State Bank of Mysore are some of the PSUs where government holding is 90 per cent as on March 31.

The proposed regulations on employees stock options intend to address issues regarding composition of trusts, facilitate secondary market acquisitions, enhanced disclosures and better enforceability, the Seri statement said. The regulations cover employee benefit schemes, which deal in shares of the company, in addition to ESOS and ESPS. Such schemes would also be permitted to acquire shares from secondary market under certain conditions so as to avoid forced dilution of capital and to be in line with international practice.

The conditions include requirement of shareholders' approval through special resolution for undertaking secondary market acquisitions and a limit of 10 per cent of the assets held by general employee benefit schemes other than ESOS type of schemes.

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