More exit options for private equities

New OFS norm to also boost IPOs & valuations, agree experts

New regulations, which allow non-promoters to exit through the offer for sale (OFS) route, are expected to boost private equity (PE) investments in listed entities. And, pave the way for more initial public offerings (IPOs).

The Securities and Exchange Board of India (Sebi) recently announced a move to widen the scope of OFS and to change the regulations governing lock-in period for bonus shares.

An OFS previously allowed promoters holding more than the regulatory threshold of 75 per cent in a listed company to unload shares in the market. It was initially restricted to the top 100 companies by market capitalisation. Sebi has since expanded this to the top 200 companies. Also, non-promoters who hold more than 10 per cent stake in a company can also use the OFS route to sell their shares, opening this route to PE entities.

The regulator has also moved to remove the lock-in period for bonus shares issued before a company's maiden public equity issue. Under the new regulation, Sebi allows bonus shares issued during a year before filing of the draft offer document to be part of the OFS, as long as these are issued from free reserves or share premium. These moves are likely to have a significant impact on how PE investors approach an IPO, say experts.

Mahendra Swarup, managing director, Avigo Capital, said: "Before the regulation, bonus shares issued a year prior to an IPO were not available for OFS and were further locked-in for 12 months after an IPO. Thus, even after the fructification of investment, funds had to remain invested in the companies. This in some cases even resulted in lower returns for the funds, as companies got exposed to capital market uncertainties."

Adding: "As most PE and venture capital (VC) funds have limited life, they tend to go for an IPO earlier than they’d otherwise prefer, to cover for the lock-in period and other uncertainties attached to it. With the change in the regulation, PE funds could have a longer pre-IPO holding period, which can be utilised to achieve a better growth/margin profile, leading to better IPO valuation and, thus, higher returns."

The data shows an IPO is the least opted route for exits by PE/VC investors in India. During the past three years (2011 till date), only 17 PE-backed IPOs, worth $823 million, had taken place.

Open market transactions lead the exit table with 203 deals worth $5.9 billion during the period. Merger and acquisition transactions were third, with 179 deals worth $2.5 bn, while secondary deals (PEs to PEs) are in second position, with 86 deals worth $2.8 bn.

Besides better exits through IPO, the OFS route also allows non-promoters who hold more than 10% stake better price discovery for their stake, potentially getting them a better rate for their shares because the stake is offered to the whole market rather than negotiated with a single entity. Earlier they could sell such sizeable stakes through block deals.

"This is an enabling provision rather than one just to allow existing investors an exit. All strategic investors can make use of the provision in the days ahead, especially those in the private equity and venture capital space," said Prithvi Haldea, chairman and managing director, Prime Database.

Vinayak Burman, Associate Partner at ECONOMIC LAWS PRACTICE, "This can be definitely considered as a welcome move for private equity investors holding more than 10% in such listed companies. This development will permit such financial investors to exit through the OFS mechanism on stock exchange and will in fact lead to a choice of a wider base of shareholding amongst public shareholders, which otherwise would not have been possible. " Further, this could be considered as an incentive for acquiring more than 10%, given this exit option, he added.