Sebi order partial to state-owned firms

WITHOUT CONTEMPT

In a range of concessions for government-owned companies, the Securities and Exchange Board of India (SEBI) has announced special treatment for such entities, engaged in the infrastructure sector. The move is aimed at enabling greater capital raising for investment in infrastructure, but is partial only to state-owned enterprises.

Under the SEBI (Disclosure and Investor Protection) Guidelines, 2000, various requirements are prescribed for companies that access the Indian capital market through an initial public offering or a follow-on offering.

Some of these crucial requirements will henceforth not apply to government-owned enterprises engaged in the infrastructure business.

To begin with, the basic requirement for promoters to contribute to 20 per cent of the post-IPO share capital has been waived. For private sector companies, if shares are issued by the issuer company to the promoters at a price less than the issue price, such shares are not counted towards the promoter contribution. This law will no longer apply to government-owned companies.

In an offer for sale (where a substantial shareholder sells shares to the public through an offer document), SEBI requires the shares being sold through the offer for sale to have been held for at least one year prior to the IPO. The intent behind this requirement was that shares should have been held for at least one year before they can be sold to the public.

Moreover, SEBI also requires all pre-IPO capital to be locked-in and be made incapable of transfer for a period of one year after the completion of the IPO. However, neither of these two requirements will henceforth apply to government-owned infrastructure companies.

Yet another troublesome requirement imposed on companies accessing the IPO market is the requirement to have a face value of at least Rs. 10 per share unless the issue price is above Rs. 500 per share. This takes away the flexibility of having a face value of the issuer's choice and brings in uniformity for all companies unless the issue price is substantially high.

However, this requirement has been done away with for government-owned infrastructure companies.

State-owned enterprises have come in for special treatment even in the minimum public float department. With a view to ensuring a bare minimum public float, SEBI normally has a requirement of minimum public float that should be prescribed for companies making IPOs. For infrastructure companies this requirement is fixed at 10 per cent of the post-IPO capital.

Strangely, for government-owned infrastructure companies, this requirement too has been done away with. In other words, state-owned infrastructure companies can have a public float of less than 10 per cent.

SEBI would surely have good reason for making these amendments. One simple reason would be the difficulties that these requirements pose for companies that are desirous of tapping the domestic market. Another stated reason is that infrastructure companies need to raise funds and these are areas that pose hurdles to capital formation for infrastructure investment. However, there is really no case for making exceptions solely for public sector infrastructure companies.

These hurdles to capital formation equally inhibit the ability of all issuers in raising capital. Even if one were to argue that the exception ought to be made only for infrastructure investment, which is a vital necessity for the Indian growth story, there is no room to argue that private sector companies engaged in infrastructure ought to be denied the same privilege.

A plain reading of the definition of infrastructure companies will show that several private sector companies in fact play the same role today.

There is no basis for positive discrimination against the ability of such companies to raise capital, and giving an uneven playing field only to state-owned enterprises.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)