Sebi norms: Big boost for small companies

Within days of issuing guidelines for the debt market, capital market regulator – Securities and Exchange Board of India (Sebi) – has unveiled a series of measures to revive the comatose initial public offering (IPO) market.

Some of the measures have the potential of bringing in good companies to the market, analysts say. With a single stroke of relaxing the minimum promoter’s stake dilution criteria to a minimum of 25% or Rs 400 crore, whichever is more, the regulator has brought the bar substantially lower for the mid-sized companies.

Earlier, there was a ceiling of Rs 4,000 crore below which the company had to dilute 25%. This ceiling has now been lowered to around Rs 1,600 crore.

Companies in a growth stage generally need capital on a regular basis. By lowering the ceiling to Rs 1,600 crore, these companies will not have to dilute more than 10%. Besides, they will have three years to dilute the incremental 15%.

However, the question of manipulation of share price and financial numbers that was applicable to companies over Rs 4,000 crore will now be valid for the smaller companies.

Brijesh Parekh, VP ECM, Ladderup Corporate Advisory believes that the measures would be a big boost for smaller companies to raise money from the equity markets.

“Earlier, these companies had to go to private equity players which worked out to be a costlier affair both in terms of performance and operational freedom. Allowing them to tap the market for funds and giving them three years for further dilution will bring in a number of good quality smaller companies to the market,” he says.

PSUs in limelight

Sebi’s measures on public sector undertakings (PSUs) are an equally important. Public sector companies will now need to have public holding of 25%.

With the new government at the centre, investors were expecting turnaround of these companies. By asking PSUs to dilute stake will not only revive the primary market but also help the government raise the much needed money.

The move will result in 36 PSUs tapping the market, according to reports with the maximum dilution in Coal India. As regards minimum public shareholding (MPS), Sebi has given a time frame of three years to the government to fulfil the criterion.

The amount of funds that can be raised can not only revive the IPO market but also the entire financial sector. Merchant bankers, brokers, bankers will all benefit from Sebi’s measures of reviving the IPO market.