(The following post is contributed by Yogesh Chande, an advocate practising in Mumbai)
Background
The Securities and Exchange Board of India (SEBI) by a circular dated 1 February 2012[1] (Circular), has permitted the Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (Stock Exchanges) to provide a separate window, i.e. apart from the existing trading system for the normal market segment, to facilitate promoters of listed companies to dilute/offload their holding in listed companies in a transparent manner with wider participation,. This was approved at the board meeting of SEBI held on 3 January 2012.
Following are the salient features of the Circular
1. Promoter / promoter group entities (Sellers) (that are eligible for trading) of listed companies which are required to comply with minimum public shareholding requirements[2] in terms of Securities Contracts (Regulation) Rules, 1957 can avail the OFS window.
2. the Sellers which belong to top 100 companies based on average market capitalization of the last completed quarter can also avail the OFS window to dilute their shareholding.
3. The Sellers should not have purchased and/or sold the shares of the target company in 12 weeks prior[3] to the OFS (Eligibility to sell). The Sellers will have to undertake not to purchase and/or sell shares of the target company for a period of 12 weeks after the OFS.
4. All investors registered with the brokers of the Stock Exchanges, other than the Sellers, will be eligible to buy the shares to be sold by the Sellers.
5. The minimum size of OFS should be as follows:
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Minimum size of OFS / Dilution
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Paid-up share capital
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1% of paid-up share capital, subject to a minimum of Rs. 25 crore
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More than Rs. 25 crore at closing price on the specified date*
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10% of paid-up share capital or such lesser percentage so as to achieve minimum public shareholding in a single tranche.
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Less than Rs. 25 crore at closing price on the specified date*
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* Specified date means the last trading day of the last completed quarter.
6. Sellers are obliged to make an announcement of their intention to sell the shares, at least one clear trading day [and not one trading day][4] prior to the opening of the OFS. The announcement should contain information prescribed in the Circular[5]. Advertisement pertaining to the OFS can be made only after the announcement / notice of OFS has been made. Contents of the advertisement should be consistent with the announcement / notice issued to the Stock Exchanges.
7. All expenses relating to the OFS will have to be borne by the Sellers[6].
8. Sellers are required to appoint broker(s) for the purpose of OFS. Same broker is permitted to carry out the buy transaction on behalf of the buyer(s).
9. Sellers have an option to declare a floor price, either in the announcement or in a sealed envelope to Designation Stock Exchange (where the orders shall be placed) (DSE) before opening of the OFS in which case, the floor price shall not be disclosed to anybody including the selling broker(s). The sealed envelope shall be opened by DSE only after the closure of the OFS and the floor price shall be informed to the market. In case the floor price is disclosed, no bids shall be accepted below the floor price and no allocation will be made in case the bid is below the floor price.
10. Duration of the OFS cannot exceed one trading day and the orders will have to be placed by the trading members (selling brokers) during trading hours[7].
11. The order placement should be made through a separate window for the purpose of OFS. The modalities of the order placement have been prescribed in clause 5(e) of the Circular.
12. There is no price band for orders/bids placed in the OFS.
13. Buyer(s) will have to pay 100% of the order value in cash up-front. Correspondingly, the entire quantity of the shares proposed to be sold will have to be deposited by the Sellers prior to the OFS as margin.
14. A minimum of 25% of the shares offered is required to be reserved for mutual funds and insurance companies subject to allocation methodology[8]. There is an option as regards allocation methodology i.e. either on a price priority basis (at multiple clearing price) or on a proportionate basis at a single clearing price. No single bidder other than mutual funds and insurance companies can be allocated more than 25% of the shares being offered through OFS.
15. The settlement will take place similar to “trade-to-trade” basis[9] and will be completed on a T+2 basis.
16. The OFS, once announced, can be withdrawn prior to its proposed opening. There shall however be a gap of 10 trading days from the date of withdrawal before a subsequent OFS can be launched.
17. Cancellation of OFS during the bidding period is not permitted.
Some observations
A. The Circular is an additional window (other than the “block deal” window) available on the Stock Exchanges for specific purposes mentioned above.
B. The Stock Exchanges will have to issue a list of top 100 companies based on average market capitalization of the last completed quarter after the completion of every quarter.
C. There is no mandatory requirement under the Circular to appoint a SEBI registered merchant banker for conducting OFS.
D. As regards paragraph 3 mentioned above (i.e. Eligibility to sell), the Sellers will have to carry out a thorough due-diligence to ensure that, none of the entities forming part of the promoter/promoter group have purchased and/or sold the shares of the target company during the stipulated period prior to the OFS. From a diligence perspective, there could be issues typically in case of companies, where, for example either: (i) the promoter group is too large and there is no system in place to ensure this; or (ii) the compliance officer is not adequately kept informed about the trades; or (iii) there are factions within the promoter group leading to miscommunication etc.
E. The OFS window will be an “anonymous” trading window as far as the identity of the bidders is concerned, though the “category” of the bidders (e.g. mutual fund, insurance company) would be known. Identity of the Sellers will be known to the bidders and the buying brokers.
F. The responsibility of allocation of shares is vested with the DSE based on the methodology disclosed in the notice by the Sellers as explained in clause 14 above. Thus, there is no “consultation process” involved between the DSE, either with the Sellers or the selling broker, at the time of actual allocation of shares by the DSE. However, the DSE will have to ensure that, the spirit of the Circular i.e. the allocation is not only done in a transparent manner but also results in scattered allocation of the shares.
G. SEBI has correspondingly amended clause 40A of the equity listing agreement[10] and has included OFS as one of the mode for diluting promoter shareholding.
H. It appears that, the brokers will have to comply with the provisions of SEBI circular dealing with disclosure of trade details of bulk deals i.e. with respect to all transactions in a scrip where total quantity of shares bought/sold is more than 0.5% of the number of equity shares of the company listed on the Stock Exchanges.
I. As regards clause 5(b) of the Circular i.e. announcement / notice to Stock Exchanges of the OFS, though the responsibility is of the Sellers to make such an announcement, it is not clear whether such an announcement can be routed by the Sellers through the target company which in turn will inform the Stock Exchanges about the same or should the Sellers directly inform the Stock Exchanges about the same.
J. Again from a diligence perspective, the Sellers will have to be careful as regards provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 (Regulations) prior to affecting the sale through OFS because they have superior access to information pertaining to the target company. It will also be crucial at what point in time, the Sellers will inform the target company (as mentioned in I above) about their intent to dilute their shareholding in the target company, and whether such an event would require closure of the “trading window” by the target company in terms of the Regulations, till the information remains unpublished. Adequate “chinese walls” also need to be in place between the Sellers and the target company, till the time information pertaining to OFS is unpublished.
K. Needless to say that, the Sellers and the buyer(s) will have to comply with the applicable reporting requirements prescribed under the Regulations and under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
On 1 March 2012, the President of India acting through and represented by the Ministry of Petroleum and Natural Gas, Government of India, sold 427,774,504 equity shares held in ONGC by adopting the OFS window provided by the Stock Exchanges.
– Yogesh Chande
[1] And subsequent clarifications by circular dated 23 February 2012 and 27 February 2012.
[2] 25%.
[3] It will have to be examined whether, this will include for example “inter-se” transfer of shares if any, between the promoters.
[4] i.e. T minus 2, T being the trade date
[5] Clause 5(b) of the Circular
[6] Section 77(2) of the Companies Act, 1956
[7] Currently 9.15 am to 3.30 pm IST
[8] Unsubscribed portion thereof can be made available to other bidders
[9] Selling / buying of shares in that scrip results into giving / taking delivery of shares at gross level and no intra-day netting off / square off facility is permitted, unlike in case of a “compulsory rolling settlement”
[10] Circular dated 8 February 2012
Cryptic Comment (intended to inviting serious thoughts)>
If read, from the point of view of 'the stakeholders' at large, and as a matter of common concern to one and all, be it direct or otherwise,one has a very great doubt as to what extent the reported circular could really be regarded to be a 'welcome move', as is the impression sought to be given.
Especially, the poser is, – in order to be regarded a 'welcome move', even in its limited practical sense, should not one keep in view the true implications of the background (ref. opening paragraph), so also of the multitude of uncertainties as commonly conveyed by usages such as, IF, BUT, SUBJECT TO; despite the fact that such suggestive but intriguing words are not actually used, but from the 'diligence perspective' seem to be necessarily required to be read, in between lines.
Could the author please suggest more reading material on the same?
I am keen to know more on this topic and upto now I haven't come across many academic discussions on this.
The ONGC sale seems to have invoked a lot of reactions but the methodology adopted has not been discussed in detail in various writings.
Is it necessary to have a Board resolution to sell promoter shares in the situation given here. A lady was one of those who received promoter shares in a public limited company over 50 years ago. When she died over 10 years ago she left some of the shares in a trust. For the trust to now divide the assets among the inheritors it is necessary to sell these shares which have been demateriaised. She was never a majority shareholder and the total amount of shares are not a material percentage in the overall share breakup of the company. Can these shares be sold using the OFS mechansm?
I'm still waiting on the author's response regarding my request for more insightful material.
Good that more light has been shed on the IPP process though. Short post but quite sufficient to sum up the entire provisions of the process as such.
Business Standard yesterday (http://www.business-standard.com/india/news/share-auction-data-show-active-participation-by-retailinvestors/469813/) reported that, there was active participation by retail shareholders in the ONGC auction i.e. offer for sale through stock exchange mechanism.
If it was not for "offer for sale through stock exchange mechanism", companies like Wipro and ONGC which have so far adopted the said route, would have probably resorted to other permissible routes under clause 40A(ii) of the equity listing agreement.
ONGC had adopted the "offer for sale" route through filing an offer document with SEBI in March 2004 (http://www.sebi.gov.in/cms/sebi_data/attachdocs/1292999271205.pdf). [Those interested may specifically read the "SEBI disclaimer" on the cover page and page number 38 of the said document].
Needless to say that, diluting promoter shareholding (in a company which is already listed) pursuant to an "offer document" by filing the same with SEBI or through "Institutional Placement Program/IPP" route (not involving allotment), is time consuming, unlike "offer for sale through stock exchange mechanism", which is much faster. Even if assuming that, SEBI observations are not required on the draft offer document, the offer document still needs to be drafted by following a stringent due diligence process which is time consuming.
The selling shareholder while adopting a particular route for dilution, also needs to be bear in mind the commercial implications. For example, the selling shareholder will get the STT (Securities Transaction Tax) benefit in case of "offer for sale through stock exchange route". In case of IPP (not being allotment), the sale is not on the floor of the stock exchange.
As mentioned earlier, the key to success for any kind of offering is pricing of the securities being offered to the potential investors, irrespective of the mode being adopted.
To reiterate, "offer for sale through stock exchange mechanism" is a welcome move.
As far as the methodology of "offer for sale through stock exchange mechanism" is concerned the SEBI circular is self explanatory.
Kind regards,
Yogesh Chande