Stripping Down To 75%

The government made amendments in the Securities Contract (Regulations) Act in June 2010, making it a requisite for private listed companies to have a minimum public shareholding of 25%. The deadline for making sure these changes are in place was set to June 2013 for all these companies. The minimum requirement for public shareholding in Public Sector Undertakings (PSU) was set at 10% and the deadline for this purpose was set at August 2013. There are three routes available to companies for complying with this requirement; an Institutional Placement Programme (IPP), an Offer for Sale (OFS) or a Follow-on Public Offer.

An offer for sale of shares to retail investors would be a difficult task to complete meaningfully since promoters wouldn’t want to offer a huge discount and buyers wouldn’t want an aggressively priced offer. In order to reduce volatility in valuations caused by market conditions, the SEBI has allowed a maximum discount of 5% on the calculated price.

Early attempts at offloading a stake include those of Godrej Properties, Wipro and ONGC. Godrej Properties opted for the IPP route and reduced the promoters’ stake from 83.79% to 75%. This was a successful attempt after the markets witnessed a lukewarm response to the OFS of Wipro and ONGC earlier. This was mainly because of the underlying weakness in the financial markets seen during the period when these two companies came up with their OFS.

Recent movements on this front saw a stake sale of 6.03% by DHL Express (Singapore) in Blue Dart Express to reduce promoter holding from 81.03% to the required 75%. Honeywell Automation too brought down its promoter shareholding from 81.24% to 75% through an OFS on December 14, 2012.

Reliance Power has announced selling a 5.42% stake today, December 19, 2012. This sale shall commence at 12 pm and close on the same day at 3 pm (accordingly it is underway even as we write this article). Promoters Reliance Infrastructure, Reliance Innoventures and AAA Project Ventures would be the sellers in this offer. Likewise, a promoter stake of 2.8% would be offloaded in Eros International Media on Thursday, December 20, 2012 commencing at 9:15 am and closing on the same day at 3:30 pm.

According to the regulations, newly listed companies will be allowed 3 years for their public shareholding to reach 25%. This is applicable in the case of Bharti Infratel, which is in the process of listing. The promoter shareholding in Bharti Infratel would be 79.42% post listing but it would have ample time to offload this stake.

Another possible way of tackling this issue for promoters with extremely high shareholding is to delist the company by buying out the public’s stake. In a case like this, the promoters, which held a 94.45% stake in Alfa Laval, indicated an offer price of Rs 2850 per share, with the final price dependent on the price at which the maximum number of shares would be tendered. However, the final price of delisting got fixed at Rs 4000 per share, a 40% premium to the offer price. Investors can keep an eye on similar offers where foreign promoters look towards getting their companies delisted.

With the deadlines for minimum public shareholding and government divestment approaching, investors can keep a close eye on stake sales in companies as per the list below.

Promoter Shareholding (%)