The primary market for equity issuances is not running all dry. Only, the traditional methods of share sale like follow-on public offer are being shunned by companies and they are opting for equity issuance through the offer-for-sale (OFS) route. The OFS, which had got a bad name during the Oil and Natural Gas Corp (ONGC) and Wipro share sale in March this year, seems to be doing well after margin requirement and other norms were tweaked. Seven companies have used OFS to sell stake in the past six months.
As alliances and consolidation among stock exchanges (SEs) are not working out well globally, their main business has been to attract companies to raise money on their platform. In such a scenario, OFS would be key for domestic exchanges to attract companies to raise money. Currently, SEs are locked in a cut-throat competition, as MCX- SX will launch equity trading in Diwali and thereafter the Delhi Stock Exchange would go live in December or January.
Apart from ONGC and Wipro, Jaiprakash Power Ventures, Parag Shilpa Investments, D B Corporation, Sical Logistics and Muthoot Capital sold their stake via OFS.
The method is cost-effective, as it reduces the role of bank syndicates and registrars and cuts share-sale time. Market experts say not many investment bankers like the OFS route, as it reduces their influence. SEs control share sale under OFS and their charges are a bare minimum. In fact, the Bombay Stock Exchange (BSE), which was the designated exchange for all the seven issues, has not charged any fee from companies. It is the way for an SE to make its name counted as a key venue for equity issuance. For exchanges, OFS mean more business, as a large chunk of shares change hands on their respective platforms, giving these leverage to attract more companies and trader participation. Promoters of these companies have together managed to raise between Rs 15,000-20,000 crore through OFS. Except Wipro, all other issues were fully subscribed.
OFS adopts the auction route for share allotment and it is conducted during normal market hours and bid quantities are updated on a real-time basis. All bids are required to be backed by cash margin, which is decided by the SEs. Earlier, the margin requirement was 100 per cent, which was a key reason for the ONGC fiasco.
“Going ahead, OFS will be the most preferred route of auction for companies. It is only some investment bankers, who are against the method, as allotment process and other such things would not be under their control. However, the regulator will have to widen the scope of OFS and allow more companies to sell shares through it when the market improves,” said the head of corporate finance department from one of the companies that sold shares through OFS.
While OFS was criticised by investment bankers during the ONGC issue, the controversy was more so due to lack of preparedness from the government. Exchanges declared bids had come for only 290 million shares. Later, it came to light the demand was low for the auction and LIC had to subscribe to more than 300 million shares and bail out the Rs 12,700 crore government issue.
Both OFS and the institutional placement programme (IPP) were introduced by the Securities and Exchange Board of India this year to allow promoters to bring their stakes to the stipulated limit. The regulator has fixed June 2013 as the deadline for promoters to ensure a minimum public shareholding of 25 per cent in their companies. Only the Godrej Group has used the IPP method for share sale till now.
