When promoters offload, Should you buy?

One month, seven offers. The deadline to bring promoter holding in companies down to 75 per cent fast approaches and promoters have been scrambling to offload stake. Last month alone, promoters of seven companies made an offer for sale of shares.

But four of these offers are now trading below their offer price. And this is the theme that runs through most of the offers for sale which have come up since 2012. Compounding the stock slide, the floor price — or the minimum price at which shares would be sold — of many of these offers was set well below the actual prevailing market price. This, in turn, sent some stocks plunging even on the day of the offer.

Promoters of private companies holding over 75 per cent have until June this year to sell their shares to adhere to the maximum promoter stake allowed by SEBI. Government companies have until August to meet their 90 per cent shareholding ceiling.

The list of companies who are to comply with this rule numbers over 100. Therefore, expect a steady flow of offers for sale and other offers by these companies to dilute promoter holding. If you hold any of these stocks, what should you do? Here’s what has happened with offers thus far, to help you decide.

FIIs do the buying

Promoters were allowed to use the offer-for-sale route or the institutional placement route to reduce stake from early January 2012. Since then, there have been 31 offers through these mechanisms hitting the market. Collectively, about Rs 6,330 crore has been added to the free-float market capitalisation.

Going by the change in shareholding patterns, these shares have been snapped up primarily by foreign institutional investors (FII). Seven of every ten offers have seen a jump in FII holding post the offer for sale. Mutual funds are a close second.

For instance, promoters of Fresenius Kabi Oncology offered 1.4 crore shares last October. The December shareholding pattern shows a drop of 9 percentage points in promoter holding to 81 per cent, while FII holding shot up 8 percentage points to 7.8 per cent.

Similarly, in the case of Disa India, mutual fund holdings went up about 12 percentage points at the close of the December quarter against an 11 per cent drop in promoter holding. The offer for sale was held in November.

Other companies which have seen a significant surge in institutional holding include Godrej Properties, DB Corp and Honeywell Automation. Retail investors, though, have hardly participated in these schemes. Barring a few, such as in Muthoot Capital Services and Hindustan Copper, retail holding has not changed much.

An increase in institutional holding is certainly a positive outcome since it could bring about a higher degree of accountability in company doings and help protect the interests of the smaller investors. But for small-cap companies such as Aroni Commercials or Xchanging Solutions, it is doubtful if FIIs would be as forthcoming. In their case, investors may need to brace for difficulties in closing the offer or steeply discounted prices.

No volume change

Once the offer is through, can shareholders look forward to more liquidity in these shares? Among the arguments for reducing promoter holding was the increase in liquidity and greater market depth. But actual experience shows that there hasn’t been any discernible change in volumes traded for most stocks. For companies such as Disa India, Aroni Commercials, MPS, Pioneer Distilleries and Elantas Beck India, change in monthly volumes traded doesn’t show any correlation to the increased public float.

For instance, public shareholding for Disa India went up to 25 per cent from the earlier 11 per cent after its offer for sale in November last year. But monthly volumes traded for the stock have seen no significant change since then, ranging between 5,000 and 10,000 shares.

Dipping post-offer

These offers for sale/institutional placements are usually open for one day, with a floor price fixed for allotment of shares. And 22 of the 31 offers/institutional placements have been made at a discount to the prevailing market price. But investors hoping to cash in on this lower price were left disappointed, with share prices of most of the stocks sliding post the offers. About half the stocks are trading below their floor prices.

Consider Kennametal India, for instance. The floor price for the offer for sale was fixed at Rs 435, 18 per cent below the market close the day before the offer. The stock dipped 10 per cent on the day of the offer and has only just recouped losses. Stocks such as JP Power Ventures, Reliance Power and Eros International Media are well below offer floor prices. A few, such as Rashtriya Chemical Fertilisers and Adani Enterprises (second tranche) have been at premiums to prevailing market price. But even here, stocks have lost a fair bit.

With the current gloomy market sentiment and a tight deadline, promoters making offers for sale or institutional placements are likely to price offers at discounts in order to push them through. Going by the past performance, prices of these stocks are set to be volatile. Almost 60 per cent of the stocks are at prices well below levels prior to the offer.

Small-cap dominance

Adding to the risk factor is that most companies yet to meet the shareholding rule are concentrated in the small-cap space. Of the 111 companies left, almost a third have market capitalisations of less than Rs 100 crore, pegging up the risks involved.

The reduction in promoter holding in these companies will add about Rs 3,400 crore at current prices to the public shareholding. But with their small sizes, the plummeting prices in mid and small-cap stocks in the past few months and the lack of investor interest thus far, there may also be few takers for shares of these companies.

Takeaways

So what’s in it for you as a retail investor? Well, given that the offer for sale rule forces companies to issue or sell shares in tepid markets, you can hope to bag shares at a discount.

But hoping to make quick gains by buying in at discounts is unlikely to work. These offers are, however, a good option to buy fundamentally sound stocks with good earnings potential to hold over the longer term. It is best to refrain from picking up shaky small-cap stocks, given the likelihood of a discount on the sale with just two months left to comply with the regulations, and a volatile stock price in reaction.

> bhavana.acharya@thehindu.co.in

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