Market regulator the Securities and Exchange Board of India (Sebi) today said the rationale behind allowing the auction route for companies to sell stake in the secondary market is aimed at the paramount objective of protecting interests of retail investors.
"Sebi's objective is to protect interests of retail investors. We also have to put in place a system wherein companies can meet the mandatory 25% public float guidelines by the 2013 deadline. At the same time, we have to ensure that interests of retail investors are not jeopardized in this process," Sebi Chairman UK Sinha said explaining the rationale behind allowing the auction route.
He was talking to reporters at the Bombay Stock Exchange (BSE) after launching the country's first unified KYC Agency by the Central Depositories Services, under the new know-your customer norms.
"The main rationale behind yesterday's decision is to allow companies to meet the 2013 deadline to have 25% of their shareholding in the public domain. Sebi is of the view that we should help companies to meets our own requirements. And we have realised that they wont be able to meet this with the current method of FPOs considering poor market conditions and the low prices of their stocks," he said.
After a board meeting, Sebi had yesterday announced steps to expedite stake sale by promoters by opening a new window called the institutional placement programme (IPP) route, besides relaxing the rules governing share buyback process.
"Another reason, which is of paramount importance to Sebi is protecting interests of retail investors. If we stick to the FPO route, past experiences have shown that retail investors interests were not protected. And if we continue with the existing method, then their interests will be jeopardised and they will be ultimate losers," Sinha added.
"Past experiences have shown that the interest of retail investors were not protected when companies adopted the follow-on public option (FPO) route to offload their stake. And we are of the opinion that if we continue with the existing FPO method, then their interests will be jeopardised," Sinha said.
Normally, retail investors as also existing shareholders lose out in the FPO game as promoter companies bring down the share price to make the new offering more attractive to new investors. This has happened with all the FPOs from the PSUs last year.
"Another reason behind yesterday's decision is to allow companies to meet our own 2013 deadline to have 25% of their shareholding in the public domain.
"Sebi is also of the view that we should help companies to meet our own requirements. And we have realized that they won't be able to meet this deadline with the current method of FPOs considering the existing poor market condition and with very low share prices," he added.
The new IPP window will allow promoters to sell up to 10% of their capital through the auction route instead of the FPO model.
Sebi's latest move will pave the way for the top 100 companies, including blue-chip state-run enterprises like ONGC, IOC, SAIL, BHEL and NTPC, from which the Centre is planning to divest more of its stakes. Leading Sensex companies like Wipro will be able to offload its equity expeditiously and meet the mandatory 25% public float.
The decision comes in the backdrop of the government running against time to meet its divestment target of Rs 40,000 crore this fiscal. So far, it has been able to mop up only under Rs 3,000 crore this fiscal.
In the 2011 calendar, both the Sensex and Nifty lost 25% of their value from December 2010 closing, making them the worst performing indices in the leading emerging markets, as FIIs turned out to be net sellers in 2011 against a whopping $29 billion investment in 2010.
