The domestic private equity (PE) space is set to pick up steam, as companies planning public offers may first sell stake to PE investors to meet the government’s 25 per cent mandatory public float directive.
Analysts said that the new norms would certainly perk up the volumes of pre-IPO private equity deals in the coming days, as the companies feel that an outright public offer of 25 per cent might not give them the desired prices.
Although restoring sanity to pricing of shares was one of the stated objectives of the government move, promoters may not let go of their greed so easily, it appears. Companies have already started discussions with investment bankers about possible ways to still extract the maximum possible price for their shares, said a top banker on condition of anonymity.
Pointing out that it was easier to get a good price in a private equity deal, where the number of investors is very less, as against that in a public offer where the price is based upon the appetite of thousands of investors, the banker said that this would lead to companies preferring to raise money from PE funds, rather than going in for a 25 per cent stake dilution at one go.
The government on Friday asked the companies to maintain at least 25 per cent of public holding to remain listed and reach this threshold limit by diluting a minimum five per cent a year. But, the companies seeking new listing would need to get 25 per cent public holding in the very beginning, if their post-issue market capitalisation is up to Rs 4,000 crore. Those already in the process of going public and have filed draft prospectus could disinvest stipulated 10 per cent and later meet the condition.
“It would lead to private equity transactions, where the promoters would want to sell a certain percentage of shares, rather than going for an IPO and immediately dilute 25 per cent,” the country’s top brokerage and investment banking firm ICICI Securities’ Managing Director and CEO Madhabi Puri-Buch said.
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Buch said that the move would certainly deepen the market with larger participation of public shareholders and greater liquidity of shares available for trading. “But, at the same time, many of the promoters do not like to initially dilute too much at the high growth stage... I think which would lead to private equity transactions, where the promoters would want to part with only 7-12 per cent rather than going for an IPO and immediately dilute 25 per cent. As the company goes through various stages, they might first seek to get a better valuation through private institutional equity placement and then the IPOs would come at a later stage,” I-Sec chief noted.
Brokerage firm SMC Capitals’ Equity Head Jagannadham Thunuguntla also said “activity in the PE space may go up as companies would prefer to raise money from funds if the valuations are better there. The regulatory change should give some momentum to the PE market.”