Business   

Follow-on public issues placed on fast track

The capital market regulator, the Securities and Exchange Board of India, has announced guidelines that will enable some top, already listed, companies to issue additional capital expeditiously and in a cost-effective manner.

The new relaxation follows a recommendation from the Primary Market Advisory Committee. It will, however, be applicable only to companies meeting some stringent criteria.

To qualify, the companies must have been listed on the National Stock Exchange or the Bombay Stock Exchange for at least three years and have an excellent track record in redressing investors’ grievances. Such companies should have an average free float market capitalisation of at least Rs. 10,000 crore during the last one year. Further, trading on the stock exchanges should constitute at least two per cent of total listed shares during the previous 12 months.

The eligible companies should comply fully with the stock exchanges’ listing requirements. Another important precondition is that the promoters’ entire holdings must be in a dematerialised from. Also, the impact of auditors’ qualifications in the audited accounts, if any, should not exceed five per cent of the net profit/loss after tax. Finally, there should be no pending prosecution proceedings or show cause notice issued by SEBI against the company, its promoters and whole time directors. Once they meet all these conditions, companies can issue additional share capital to the public (follow on offerings or FPO) on the basis of a system of rationalised disclosures and simplified procedures.

Specifically, (a) the stock exchanges shall give in- principle approval based on the board/shareholders’ resolution authorising the issue. (b) The prospectus/letter of offer (for a rights issue) shall be prepared by the lead manager taking into account the existing requirements of company law and SEBI. They shall continue to be filed with SEBI and stock exchanges for record purposes.

(c) The lead manager may then proceed with the issue after filing the offer document with SEBI and getting in-principle approvals from the stock exchanges. (However company law requirements may cause delay in certain cases).

(d) The lead manager shall ensure that any material developments in the issue are promptly disseminated to the public at large by way of public notice.

Capital issuing companies as well as the investor community stand to gain when these guidelines take effect. For the companies, there can be considerable saving in time.

At present, SEBI rules do not draw a distinction between an initial public offer (IPO) and a follow on public offer (FPO) in the matter of certain procedures. In both cases, the offer documents will have to be filed with the regulator which will issue an observation letter within 30 days from the date of filing.

Under the new dispensation an eligible company can considerably cut short the procedural delays and go to the market once the minimum formalities are complied with.

An equally important benefit arises from the new rationalised disclosure guidelines. The stringent eligibility criteria will automatically ensure that only top companies which have a good track record in settling investors’ grievances and otherwise comply with the continuous listing agreement will make the grade.

There is no point in insisting on the same set of disclosure standards for these companies as are applicable to the companies making an IPO. Besides, the large market cap and the liquidity of the stocks — that are part of the guidelines — suggest that secondary market trades worth several hundred crores of rupees are fairly common with these stocks .That in turn should vindicate SEBI’s stance: what is good for the secondary market investors should be good for those investing in the follow on public offers of select companies.

As a direct consequence of the procedural relaxations, the eligible companies will now be able to time their share issues. This is a huge advantage, given the hjgh volatility of the stock markets. There will be some kind of certainty in pricing the issue. The expectation is that many of these companies, buoyed by the simplification in procedures, will raise capital from within India rather than go abroad.

Small investors stand to gain inasmuch as additional high quality stocks will be available to them in the secondary market. In a way they will be getting benefits similar to what the bigger investors — qualified institutional buyers — are getting through the QIP (qualified institutional placement) route that was introduced by SEBI last year.

C. R. L. NARASIMHAN

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Training facilities for aviation sector jobs
Actuarial funding in unit linked insurance products
Follow-on public issues placed on fast track
System of tax credit needs reform
Sarma seeks relook at import of copra and coconut oil
State business fete to tap Indian markets

Copyright © 2007, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu