Sebi moves to rev up IPO market with slew of reforms

Get ready for some big action in the primary market. A number of large government-owned companies are likely to bring initial public offers, or IPOs, with the Securities and Exchange Board of India (Sebi) telling them to dilute at least 25% stake to the public.

At present, they are required to keep at least 10% stake with the public. The move is aimed at bringing the minimum public holding in government-owned companies on a par with that of private sector companies, which are already required to offer at least 25% promoter holding to the public. Government-owned companies where the public holds less than 25% stake will get a three-year period to conform to the new rule.

"This will result in a number of PSU companies coming to the primary market in the next three years. It will also help the government in the divestment process, besides increasing retail participation in the equity market," says Dipen Shah, head, private client group research, Kotak Securities.

There are over 30 government-owned companies, including Coal India, Hindustan Copper, Nalco and MMTC, where public shareholding is less than 25%.

This is one of the many primary market reforms unleashed by the capital market regulator on June 19. Many are aimed at increasing the participation of retail investors in the primary market.

Now, at least 10% issue size of offers for sale (OFS) will be reserved for retail investors. If this part remains unsubscribed, it can be sold to other investors. OFS is a mechanism through which promoters (as well as non-promoters who hold 10% or more shares) of a listed company can dilute their stake through bidding on exchanges. It is an easier option than a follow-on offer for large stakeholders of listed companies. The number of companies allowed to take the OFS route has also been increased from top 100 in term of market capitalisation to top 200. Now, even non-promoters with 10% or more shares will be allowed to launch an OFS.

"Now, we will see more private equity funds using the OFS facility to exit their holdings in a transparent manner," says Girish Nadkarni, managing director, Motilal Oswal Investment Banking.

Sebi has also tweaked the rules for minimum dilution to the public through IPOs for companies with market capitalisation of less than Rs 4,000 crore. The new rules say that the minimum shares that such a company can offer through an IPO is either 25% or Rs 400 crore, whichever is lower.

"This will remove the anomaly that a company with market capitalisation just short of Rs 4,000 crore was required to dilute about Rs 1,000 crore while another company with Rs 4,000 crore market capitalisation was required to dilute only Rs 400 crore," explained Sebi. Sebi has also allowed anchor investors to bid for up to 60% institutional investors' quota in IPOs. Earlier, the figure was 30%.

In an IPO, 35% issue size is reserved for retail investors, 15% for high networth individuals and the rest for institutional investors. Anchor investors are the first investors in an IPO. The bidding for them opens a day before. They cannot sell their holding for one month from the allotment date.

"This will help gauge anchor investors' trust in a particular issue before it is offered to retail investors," says Anil Chopra, group CEO, Bajaj Capital. Sebi has also cleared the road for sharing of KYC (know-your-customer) details with financial institutions other than those registered with it. Sebi has also approved new research analyst regulations, which will require research analysts to be registered with it. These analysts include individual analysts, brokerage houses and merchant bankers.

However, investment advisors, credit rating agencies, portfolio managers, asset management companies, etc are not required to be registered under these regulations.