Offer for sale: Should retail investors rush in?

Investors should consider subscribing to an offer where fundamentals of the company are strong and priced reasonably.

June 04, 2013 3:21 IST | India Infoline News Service
With few days left for public sector undertakings to meet the Securities and Exchange Board of India’s June deadline on minimum 25% public shareholding, expect a deluge of offer for sales. But given the rich valuations that a number of bluechips are trading at, the moot point is whether investors should subscribe at current levels.

On June 3, nine companies entered the market with offers to sell shares over Rs. 4.5bn. While six of them including Tata Communications, Rama Phosphates, Marathwada Refractories saw their OFS (offer for sale) oversubscribed, the issues of BGR Energy Systems, Essar Ports and Omaxe failed to get fully subscribed.

What is an offer for sale?
An OFS is the way by which stakeholders of a company sell their holding. OFS enables promoters to dilute their holdings in listed companies in a transparent manner with a wider participation through an exchange-based bidding platform. The OFS route helps the promoters of an already listed company to sell their existing shareholdings through an exchange-based bidding platform.

According to the SEBI (Securities and Exchange Board of India) guidelines, all private sector listed companies should have at least 25% public shareholding and promoters were directed to lower their stake to 75% or below by June 2013.
PSUs are required to divest about Rs. 40 billion before August 8, 2013 to meet the 10% public float norms. 

The market regulator had announced these guidelines in June 2010. However, the companies began to follow these guidelines in the recent months only. The objective was to ensure that retail investors get a larger presence and help create an equity culture in the country.

More than 60 companies offered to sell their promoter shares to meet the SEBI deadline and have sold shares worth more than Rs. 100 billion in May. Some major companies that recently sold shares include Jet Airways, Essar Shipping, Tata Tele, Novartis India, Adani Enterprises, Sun TV and JSW Energy.

Some more companies are expected to announce their offers in the coming weeks.

Should you subscribe?
According to financial planners, Investors should consider subscribing to an offer where fundamentals of the company are strong and priced reasonably.
Investors should also look at the company’s profit and loss statement. They should do some basic calculations on their own. The earnings per share (net profit / number of shares) and price/earnings ratio (market price/ EPS) should give you a fair understanding.

Things to keep in mind
OFS often include the potential for price manipulation as at times price discovery of the offer is not clear.

Market participants are of the view that promoters of the company approach a friendly merchant banker and ask it to find buyers with whom they can park the shares for a short period. The promoter provides the funds for the purchase of shares, which are bought back through some dummy companies at a later date.
The promoter may also buy the shares in the OFS through one of his many unofficial accounts.

Broking firms expect that offers worth Rs. 135 billion are likely to hit the market over the next two months, and this may bring a correction in the respective stocks of companies lining up the OFSs.

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