A bonanza awaiting investors

A great bonanza awaits investors of all hues if the central government and Securities and Exchange Board of India (Sebi) stick to their guns and resist pressure from industry bodies to extend the June 2013 deadline for compliance with the 25 per cent minimum public shareholding norm for listed companies.

By Virendra Parekh (India Monitor)

Published: Mon 20 Aug 2012, 10:04 PM

Last updated: Tue 7 Apr 2015, 12:16 PM

If the deadline is not extended, then over 150 listed companies will have to approach investors to sell shares worth Rs400 billion by June 2013. The sale could be either through issue of fresh capital or through dilution of the promoters’ holding. Whatever route the companies may choose, they will have to offer shares at prices low enough to attract investors in the current volatile market conditions. This is where a valuable opportunity for discerning investors lies.

In June 2010, the government had amended the rules under the Securities Contract (Regulations) Act to order all listed companies to have a minimum public shareholding of 25 per cent. It set a deadline of June 2013 for all private sector companies and August 2013 for all PSUs to meet these norms. The idea is to give retail investors, domestic institutions and foreign institutional investors a greater say in crucial corporate decisions.

Higher free float will also create better liquidity across stocks, help better price discovery and reduce scope for stock price manipulation by promoters or speculators. Finally, if retail investors do warm up to these offers, it may even help channel more household savings into the equity market.

Company promoters have little enthusiasm for the exercise at this juncture.

However, Sebi has ruled out any extension of the deadline. Undaunted, companies facing the heat have turned to the finance ministry for an extension, but without any success so far.

Companies in power, steel, non-ferrous metals, mining and IT will be the key ones required to make offers. Among private players who may have to come up with significant fresh issues are Wipro, Reliance Power, Godrej Property, L&T Finance, BGR Energy, Sundaram Clayton, Muthoot Finance, Adani Enterprises, Tata Teleservices, Sun TV Network, Eros International, JSW Energy, Berger Paints, Jaiprakash Power Ventures and DLF. The PSUs with very high government shareholding include MMTC, NMDC, NTPC, Hindustan Copper, SAIL, HMT, Neyveli Lignite, RCF, MOIL, Oil India and Indian Oil.

Multinationals in the list include Astrazeneca, Fresenius Kabi, Gillet, BOC India, Honeywell, Timken India, Novartis and 3M India. Quite a few multinationals would prefer delisting to dilution, so as to avoid public glare in times of rising investor activism. However, the cost of delisting by buying out minority shareholders could be steeply high, as Alfa Laval discovered recently.

Will investors accept shares from companies, which do not have growth plans or need the cash? Will the forced offerings not queer the pitch for companies that do need cash and also for the government’s disinvestment plans? Time will tell.

Sebi has now allowed two more routes to enable the companies to meet the norm: rights issues and bonus share, while stipulating that promoters will not be entitled to participate in rights issue or get bonus shares.

While this gives more flexibility to the company managements facing a short deadline in a tricky situation, it does not resolve the basic issue of pricing. But then it is not for the market regulator to get involved into issues related to fair valuation of stocks.

The countdown has begun. All eyes are centred on two dicey questions: Will the promoters be able to get the deadline extended? Would the MNCs go in for costly delisting? The next six months will be highly exciting.

Views expressed by the authorare his own and do not reflectthe newspaper’s policy

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