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Share Sale In Dribs And Drabs

SEBI's new rule is good news for promoters intending to

Last week, there was a flurry of excitement among a whole host of public sector stocks, some well-known and some obscure. The reason was SEBI's announcement of two new routes through which promoters can unload their stake on the stock markets. The excitement was unrelated to any actual logic about the valuation of these stocks. Stripped to its essentials, the news meant only that the government would be able to sell off some of its stake , thereby putting more shares on the market of some companies. Nothing would change the profitability or the prospects of these businesses. Why this should push up the share prices of these companies can be fathomed only by those who invoke words like sentiment or momentum without explaining the underlying logic.

SEBI has created two new routes for promoters to sell their stake. One is called Institutional Placement Programme (IPP) and the other is an offer for sale through the stock exchanges. Both are based on the same concept except that one is a wholesale route and other retail.

Instead of elaborate offers-for-sale, promoters will be able to auction off their stake in a quick and simple manner. This new auction route will mean likely that promoters will be able to get better price realisation for the stake they sell. They could exit in dribs and drabs, with volumes offered for sale following the curve of the markets. This obviously has benefits in terms of price realisation. One, it would mitigate the price impact of a large chunk of shares hitting the market because the seller can balance the volumes with perceived demand and his need to sell. Moreover, in the auction route, there doesn't appear to be any equivalent of an offer that fails through under-subscription. As far as one can see from what has been announced so far, a promoter is not under any obligation to accept bids for all the shares that he may be offering. He could always hold on and come back to the market again later.

However, there's one curiosity among the new provisions that SEBI has announced so far. The SEBI statement says that 'Apart from use for compliance with minimum shareholding requirements, this method can be used by promoters of top 100 companies (based on average market capitalization) for sale of their stake.' The statement appears to imply that there will be a windows for stake sale that will be open to the larger companies and not to the others. This is a little strange, to say the least. It's hard to see why the top 100 need different regulations than the rest. I wonder how the 101st on the list is so different from the 100th that a harsher rule must be applied to it. It's possible to make a case for very small or very thinly-traded stocks to be excluded from this window but to limit it to just a 100 companies chosen by market cap is unfair.

As I said earlier, these goals of these changes in rules is to facilitate promoters' stake sale. The stated motivation is to make it easier for thinly-held companies to meet the goal of less than 75 per cent promoter stake by 2013. However, no one is under any illusion that a major goal of these new regulations is to help the government sell its stake in public sector companies. Now, whenever the markets are at all strong, we're likely to see a continuous stream of auctions and IPP placements by the government. And in all probability, it will manage to get the price it wants for its shares by using these new facilities. At least one can expect it to. For if a promoter can't get to its goal despite being able to effectively make the rules, then when can it do so.

Whether investors should be excited by this or not is an entirely different matter.