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SEBI's rules for promoters to dilute stake complicated

  • Recently, I attended a seminar on the rule that says listed companies must have a minimum 25% public shareholding, with 10% for listed public sector companies. The SEBI chairman emphatically said that the three years' time given to companies and their promoters to comply was enough, and companies were on notice from 2001 that they must dilute their shareholding, now by June 2012.

    But all is not well. SEBI has allowed promoters and companies to cut promoter holding in five ways. Public issue/offer, something known as institutional placement programme (IPP) and offer for sale (OFS) and select bonus and rights offerings.

    Most of these have convoluted ways of how disclosures are made, cooling off periods, maximum shares of offer, nature of buyers and so on. In other words if a promoter sells his shares in the secondary markets, that would not be recognised as a reduction of his shareholding. But why are only five ways kosher and not others?

    Given my limited imagination, I asked two sources to understand the rationale. The first was a hypothesis of a co-panelist at the seminar, who thought it could be because of SEBI suspects that promoters could be involved in self dealing and covertly sell to friends and relatives which would defeat the purpose of divesting to the public. The second source is the SEBI board's agenda which discusses this, and cryptically cites, the "twin principles of broad basing ownership and transparency".

    The first hypothesis suffers from two problems. First, it is a rule drafted on the assumption that all promoters are crooks and if allowed to sell in the open market would evade a genuine sale to the public. I strongly disagree with such a view, but even if many promoters are crooked, the prescribed routes are no answer. Crooked promoters will put their dummies as buyers during the IPP and OFS process or five seconds later from the exchange market. If SEBI is trying to substitute enforcement against the crooks with rules, these rules are not effective to achieve the purpose.

    The second hypothesis as stated by SEBI, though cryptic, is equally fallacious. There is no higher transparency, wider distribution or further fairness in these routes. First, IPP is available only to institutions, this is contrary to the stated object of widening the investor base. Second, there is substantial time, planning and cost involved in the two processes. Given one of the most liquid secondary markets in the world - according to last week's ET, NSE is the world's number one exchange for the six month period by number of trades - it is wrong to bar such a secondary market which gives a certain 100 in this second to both the buyer and the seller and substitute it with an uncertain price after two months, an eternity in the stock market. This must be offered at a discount.

    Why would anyone buy at the market price when you can buy at the market price from the exchanges? And pay half a dozen intermediaries (including our legal tribe) making the process costly to the buyer, the seller and the company. Three, the processes may impose an obligation on a company to raise capital even when it doesn't need money. This could easily be substituted by a simple sale by promoter.

    Four, if capital is needed, the well established route of qualified institutional placement (QIP), which is a cheap and quick form of raising money without the tedious and expensive public issue process could have been permitted. However, QIP is not permitted because the current interpretation has been that a company not fulfilling the minimum public shareholding is ineligible to issue capital under this route. In other words, if you are driving on the wrong side of the road, the law will prohibit you from changing lanes as you are a violator.

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