How can you smoothen the path for the divestment of government shares in public sector undertakings (PSUs), without involving a vast population of retail investors? This seems to be the thinking behind SEBI's latest tweaks to its share offer and buyback regulations. The changes to both sets of regulations may give the stalled PSU divestment programme a helping hand.

IPPs: Bypassing retail investors

The first change is a new mechanism for companies to raise fresh capital or offer existing shares for sale, through what is termed an Institutional Placement Programme (IPP). An IPP allows companies to make fresh issues of shares or offers for sale (upto 10 per cent of equity) only to qualified institutional investors, without any shares offered to retail investors.

Such offers can be based on an “indicative” price fixed by the issuer, after filing the prospectus with the regulators. The regulation mentions that while any company can use it to meet the minimum public shareholding norms, the top 100 companies (by average market capitalisation) can use the IPP route to dilute promoter stakes too.

Now, the mechanism of IPP seems to be designed to allow PSUs to fulfil the minimum public holding rule while completely bypassing retail investors. While private sector companies are required to maintain a minimum public shareholding of 25 per cent, the requirement is only 10 per cent for PSUs.

Therefore, PSUs such as MMTC and Hindustan Copper which need to make a public offer to investors can do a placement exclusively to institutional investors. Nor do they have to go through the long winded book-building process mandated for retail offers.

Just 10 investors

The second important point is that IPPs require a minimum of just 10 investors per issue, with no single investor securing more than 25 per cent of the shares offered. This allows companies to raise money in small tranches from a select set of just 10 institutions. Whether such a sale would fetch premium prices for the government shares in PSUs is open to question. But with the offer required to be marketed to just 10 institutions, such offers will surely be much simpler to put through than a normal share sale, in the current moribund markets.

No proportionate buybacks

Tweaks to SEBI's existing buyback regulations, the other change announced on Tuesday, too may find favour with the more cash-rich PSUs such as Coal India, NMDC and MOIL. SEBI's current buyback regulations stipulate that if a company makes a tender offer (offer at a fixed price made to all shareholders) to buy back shares, it needs to buy back those shares on a proportionate basis from all investors.

To illustrate, if a company offers to buy back 10,000 shares from all its shareholders and receives 12,000 shares in response, it should theoretically accept 83 per cent of shares tendered by each investor.

This rule has now been changed to make buyback offers very similar to rights offers. In the case of rights offers, companies offer shares based on a rights ratio. If some investors fail to participate, others - usually promoters, get to mop up the unsubscribed portion at the rights price.

Now, buyback offers too are set to work on the same principle. Applying this to PSUs, the cash-rich ones may now make tender offers to buy back their shares from all their shareholders, including the government. If retail investors don't participate, or sell only part of their shares, the promoter – the government, will get to sell back more of its holdings to the company at the buyback price.

> akrishnan@thehindu.co.in

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