SEBI’s offer-for-sale rule opens exit door for LIC

LIC is a surprise beneficiary of SEBI’s announcement last week that non-promoters can sell their stake in a company through the offer-for-sale route.

Efficient route SEBI introduced the offer-for-sale mechanism in early 2012 to help promoters reduce stakes in their companies and increase public ownership to the mandatory 25 per cent level. This route is economical, quick and efficient.

Last week, the regulator also allowed non-promoters holding a stake of more than 10 per cent in the top 200 companies to use it.

Life Insurance Corporation of India stands to benefit the most from this tweak.

Thirty companies in the top 200 have non-promoters holding a stake of more than 10 per cent. In 13 of these companies — including ITC, M&M, Bank of Baroda, Bank of India and Larsen & Toubro — LIC, either directly or indirectly through its schemes, is the principal non-promoter. It holds stakes ranging from 10.2 per cent to 17 per cent.

The insurance behemoth can now sell all or a part of its stake in any of these companies by announcing an offer-for-sale through the exchange.

Broader investor base Why should investors, including LIC, use the OFS route instead of block deals? Market experts say OFS fetches a better price and broad-bases a company’s investors.

According to Yogesh Chande, Associate Partner, Economic Laws Practice: “Permitting financial investors holding more than a 10 per cent stake to exit through the OFS mechanism on a stock exchange will lead to a scattered shareholding among public shareholders. This would not have been possible if such a stakeholder was exiting through a block deal. OFS will not only help financial investors exit but also fetch them a better price for their stake.”

Market experts also feel that the move will help revive primary market activity.

“Non-promoters selling through OFS will help boost overall capital market activity by increasing liquidity,” says Zulfiqar Shivji, Head of Transaction Advisory Services, BDO India LLP.

PE investors may gain The other set of non-promoter investors who may be happy with the OFS move are private equity funds.

PEs such as TPG India Investments and Saif II Mauritius hold substantial stakes in the top 200 companies. The investment period of the PE investors is 5-7 years and they can now cash out via an OFS.

If a non-promoter decides to have an OFS, will it give rise to a conflict with the promoters? “Conflict cannot be ruled out since an exit in this fashion will increase the shareholder base. Not every promoter may be in favour of that,” says Chande of Economic Laws Practice.

“Further, an OFS of such a huge lot (10 per cent) could also lead to an increase in the supply of shares. It is conceivable that it would have some impact on the value of a promoter’s holding because the market price is likely to go down, at least temporarily. The implication of a wider base in hostile takeovers would be another area to watch,” he added.

Strategic partners The other big set of non-promoters holding more than 10 per cent in large companies are the strategic partners. These are foreign companies that share technical know-how and also take a minority stake in a company.

For instance, Axiata Investments holds a substantial stake in Idea Cellular, GDF International in Petronet LNG, and Etihad Airways in Jet Airways. But these investors may not use the offer-for-sale route as their engagement is long term in nature.

(With inputs from Anand Kalyanaraman)

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