Indian companies are rushing to complete share sales with only weeks left to increase their free floats to meet regulatory requirements, in a move seen weighing on the country’s volatile equity markets.
Real estate developer DLF and Oracle Financial Services Software are among the biggest entities planning follow-on offerings ahead of the June 3 deadline, after announcing offers for sale to raise a combined US$500m.
Fortis Healthcare, Puravankara Projects and Linde India have also announced share-issue plans to meet the requirement for a public shareholding of at least 25%.
Currently, close to 100 companies are falling short of the free-float rule and market participants estimate the total size of the share sales to be around US$2bn–$4bn. Neither the market regulator nor the stock exchanges could confirm these numbers.
As was the case in the Philippines last year, India’s free-float rules are spurring opportunities for dealmakers and promise to increase liquidity across the domestic stock market.
Many promoters, however, fear they may have to sell additional shares at steep discounts in a market that may not have the appetite for so much new equity. Some companies, such as Fairfield Atlas, are choosing to delist, while others are asking the regulator to approve innovative solutions to ease the pressure on their stock prices.
Market regulator Securities & Exchange Board of India has refused to change the June 3 deadline.
“We have 100% ruled out an extension. We will only facilitate a compliance of the rule,” a source at the market regulator said.
The facilitation is in the form of relaxing the manner in which the promoters can sell the shares or categorise them in the public shareholding category. For example, Sebi has allowed even loss-making companies to sell shares to the public to meet the free float.
Sebi recently allowed software developer Wipro to transfer the required shares from the promoter shareholding to an “irrevocable independent trust” to meet the 25% free float. The trustees would be from state-owned banks or public financial institutions and the shareholding of the trust would be considered public shareholding. The promoters currently hold a 78.28% stake in the company.
Sebi also relaxed the maximum allocation limit of 25% of the size of an offer for sale to a single investor to meet the free float for Tata Teleservices. Currently, the promoters own a 77.72% stake in the company.
The regulator has not officially indicated yet whether it will impose a monetary penalty or suspend trading if the companies do not meet the deadline. The market regulator source, however, said: “We’ll not do anything to harm the general shareholders.”
Still, the market has not lost hope that Sebi will grant promoters either an extension of the deadline or an exemption from the rule on a case-by-case basis.
“The regulator can have a deadline for a company, but it cannot create demand from the investors,” said a banker to explain the practical problem of selling so much paper.
Big blocks coming
Nevertheless, one promoter, the Indian Government, is not seeking any extension of the deadline and plans to sell shares in state-owned Andrew Yule, MMTC, National Fertilizers, Neyveli Lignite and State Trading Corpto meet a 10% free-float requirement.
The government has until August to meet the deadline.
DLF is likely to launch its 81m share Rs18.8bn (US$348m) institutional share placement this week.
The placement will increase the minimum public shareholding to 25% from 21.42%. The transaction will total Rs18.8bn at the May 6 close of Rs232.70.
DLF appointed Bank of America Merrill Lynch, Deutsche Bank, JP Morgan andStandard Chartered, along with CLSA, HSBC, Kotak Mahindra and UBS, to handle the sale.
Promoter Oracle Global Mauritius plans to sell a 5.3% stake in Oracle Financial Services Software to raise a maximum of US$200m at the current market capitalisation. The shares will be sold through the offer-for-sale mechanism on the stock exchanges.
Oracle Financial Services, which has a market cap of US$4bn, has a free float of 19.73%. Deutsche Bank and Morgan Stanley are the bankers on the selldown.
Data from the stock exchanges shows that several companies, includingGillette India, Jet Airways, Mangalore Refinery, Sun TV and Tata Communications, have yet to meet the 25% free-float requirement.