Divestment dilemmas

There is little doubt that the Securities and Exchange Board of India's (SEBI) decision to create a new Institutional Placement Programme (IPP) route to enable companies meet minimum public shareholding threshold norms is timed largely at smoothening the Government's currently-stalled disinvestment drive. With a comatose market ruling out raising of money through public equity offerings, the IPP mechanism allows firms to issue fresh shares or sell existing securities directly to qualified institutional buyers (QIB) such as FIIs, banks, insurance companies and mutual funds. This method can, however, be used only for the purpose of complying with the requirement of increasing minimum public shareholding to 10 per cent for listed public sector undertakings (PSU) and 25 per cent in the case of all other companies. Currently, there are as many as 10 PSUs — including the likes of Hindustan Copper, MMTC, National Fertilisers, Neyveli Lignite, RCF and STC — where the Government's stake exceeds 90 per cent. The capital markets regulator has ruled that IPP can be employed so as to raise public shareholding to up to a level of 10 per cent. The 10 PSUs would, then, would qualify for this route. Even if the institutions may not be willing to fork a premium to the current market price, the arrangement still presents a quick divestment option without going through the elaborate traditional primary market offering processes. In the process, the Government would mobilise at least part of its Rs 40,000 crore budgeted from disinvestment this fiscal, while the PSUs get to comply with the 10 per cent public shareholding norm.

The above mechanism is certainly not the best way to undertake disinvestment (through bypassing retail investors) or to ensure wider distribution of shares (IPP offers do not have to be made to more than 10 QIBs). Contrary to its regulatory role of protecting investor interest, SEBI's latest decision seems to be guided more by the Government's imperatives of meeting its disinvestment target. But this expediency would still be worth it if there is strict adherence to achieving the 25 per cent minimum public shareholding norm by all listed non-PSU companies by June 2013. The capital market regulator, in fact, has permitted stock exchanges to even offer a separate window for promoters to offload their stakes, which is in addition to the IPP route.

The opening of the IPP and exchange-mediated offer-for-sale windows would give the private promoters of many listed companies — there are more than 200 of them — very little excuse now not to bring down their stakes below the mandated 75 per cent. So far, they have been citing poor market conditions to justify non-dilution of promoter holdings. Simultaneously, there is no reason for having a separate lower public shareholding threshold for PSUs: It should be brought to the same 25 per cent level as applicable to other listed companies. The ultimate purpose is to widen the shareholding base to infuse more liquidity in the market and reduce potential for price manipulation.

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