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SEBI Reforms to Vitalize Markets
Jun 25, 2014

Capital market regulator Securities and Exchange Board of India (SEBI)  announced a slew of measures to boost equity issuances by India Inc and help rejuvenate the primary market, which at present seems to be in deep slumber.

In a move that will level the playing field between private and state-owned companies and bring in paper supply of nearly $10 billion over the next three years, SEBI has proposed even public-sector undertakings (PSUs) would need to have at least 25 per cent public float, compared with the current cap of 10 per cent. The regulator said the government would be given three years to meet the holding requirement.

Under the current rule, while non-PSUs are required to have a minimum 25 per cent public shareholding, state-run firms are required to have only 10 per cent. That is discriminatory and inconsistent with the broader market design. SEBI believes the rules for the market should be uniform across companies and should be promoter-neutral.

Top PSUs like Coal India, NMDC, MMTC and Hindustan Copper, which had recently achieved the earlier limit, will now have to issue more stakes to the public to comply with the new norms. According to estimates, the government will have to dilute Rs 60,000 crore worth of its stake in 36 PSUs.

This move would help attract new investors to the equity market. In a move that will encourage more companies to launch initial public offerings (IPO) SEBI relaxed the minimum dilution criteria for smaller companies. Against the earlier norms that forced companies with valuations of less than Rs. 4,000 crore to sell a minimum of 25 per cent stake in IPOs, the regulator introduced a new threshold of Rs. 400 crore. Going ahead, a company will have to divest at least Rs. 400 crore or 25 per cent, whichever is lower, through an IPO.

The regulator also doubled the portion meant for anchor investors in IPOs—the limit for these investor has been increased from 15 per cent to 30 per cent of the issue size. The shares, however, will be given from the institutional investor bucket, which is 50 per cent of the overall IPO size.

Sebi also approved a major overhaul of the offer-for-sale (OFS) route for secondary-market share sale. The regulator allowed the top-200 companies by market capitalisation and non-promoter entities holding more than 10 per cent stakes to dilute their holdings through this route. Further, for the first time, SEBI made it compulsory for companies to reserve 10 per cent shares in the OFS for retail investors and paved the way for offering discounts to smaller investors, similar to IPOs.

In another significant change, the regulator wants the pricing of shares for preferential issues and qualified institutional placements (QIPs) to be based on ‘volume-weighted average price’ (VWAP), instead of closing prices. Closing prices of shares might not be the best representative price at which shares could be transferred for it to be used as a benchmark in the pricing formula. VWAP is seen as better metric as it eliminates the outlier effects and is a more accurate determinant of prices at which transactions took place.


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