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 5 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 told PTI.
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 that "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".
According to I-Sec chief, companies would prefer to dilute stake to PEs because there is no hard rule fixing the percentage of stake sale there and the companies are more comfortable bargaining a better valuation with PE investors as against in a public offer.
However, private equity investment in the listed companies space is unlikely to see any major surge, analysts say, as the 25 per cent limit has to be met by share sale in stages of a minimum 5 per cent a year.
During the January-March quarter, PE firms invested about $2 billion across 56 deals. As per I-Sec estimates, the country could see qualified institutional placement (QIP or sale of shares to institutional investors) worth about Rs 40,000 crore in the current fiscal, which is an identical amount to the estimated public offer proceeds of Rs 40,000 crore by the private sector companies. Besides, the government has also set a disinvestment target of Rs 40,000 crore to be raised through sale of shares in state-run companies.
Last year also, the country recorded QIP deals worth about Rs 50,000 crore, an identical amount to the money raised through public offers.
At the current valuations, the listed companies alone would need to sell shares worth over Rs 60,000 crore, including more than Rs 40,000 crore by PSUs. Besides, there are IPOs worth about Rs 50,000 crore already lined up and such a huge capital could be difficult to get from the public offers alone, another banker noted, while forecasting more and more PE deals in the months to come.
However, the investment banking community has nothing to complain, as larger number of deals would only mean more business for them, the banker quipped.
