Market cop sets stage for PSU buyback

OUR SPECIAL CORRESPONDENT

Mumbai, Jan. 3: The capital market regulator has permitted public sector companies to buy back the promoter's shares — a move that will enable the government to unlock the value of its holdings at a time its Rs 40,000-crore divestment programme for this financial year has run into the ground.

In a related development, the board of the Securities and Exchange Board of India (Sebi) allowed promoters of companies to auction a part of their holdings to comply with regulations that mandate a public holding of at least 25 per cent for all listed entities.

Under the current regulations, companies can buy back shares only from their shareholders. Once bought, these shares have to be extinguished.

Sebi's decision today circumvents a major hurdle to the government's plan to raise money through the sale of its stake to the companies themselves. Now that Sebi has cleared the plan, a note prepared by the department of divestment will be placed before the Cabinet Committee for Economic Affairs (CCEA) for approval, possibly this week.

The government has been able to mop up only Rs 1,145 crore through the follow-up offer of Power Finance Corporation. The returns on the capital markets have been negative this year as a result of which the Centre could not come out with any public flotation through which it could sell its stake in PSUs.

"This will certainly help the government in meeting its divestment targets. Some changes will, however, have to be made in the listing agreement and other regulations," said Arun Kejriwal, director, KRIS.

Sebi had introduced a new system called the Institutional Placement Programme (IPP), under which promoters (holding a stake of over 75 per cent) could dilute their stake either through an issue of fresh capital or an offer for sale through the auction method on the stock exchanges.

The market regulator said that by using this method, the public shareholding in the companies could be raised by 10 per cent or less to comply with the minimum public shareholding requirements.

At present, the minimum public shareholding requirement is being met through follow-on offerings, which are relatively cumbersome.

While companies will have to file red herring prospectus with the market regulator, the registrar of companies and stock exchanges, the offer should be made only to Qualified Institutional Buyers (QIBs). A minimum of 25 per cent of the issue have to be earmarked for mutual funds and insurance companies.