Institutional investors in India are forecast to be invited to buy into a plethora of privately placed share offerings over the next 18 months following the successful completion of the first such deal.
On March 30 Indian real estate firm Godrej Properties sold $95 million in equity via private placement, in a transaction arranged by UBS Securities India and Kotak Mahindra Capital.
The deal was done through the Institutional Placement Programme (IPP), which came into force in early January in a drive by regulators to ensure that public companies meet a minimum float.
Listed mid-cap firms are required to have at least 25% of their share capital publically floated, while the requirement drops to 10% for large-cap companies.
In the case of Godrej Properties, around 15% of its shares were floated, so it needed to divest a further 10% to comply with requirements.
This it chose to do via IPP sale to qualified institutional buyers (QIBs), a mixture of pension funds, mutual funds, large hedge funds and regulated public organisations, of which there are thousands in India.
“The regulators came up with a product saying you could do a private placement with a disclosure document, which does not need to be as detailed as an IPO prospectus,” notes Manoj Bhargava, lead Jones Day capital markets lawyer on the Godrej transaction.
“You can go to as many QIBs as you want to sell this, and you can do this process very quickly. Regulators want to enable companies to comply with the public float rule as soon as possible.”
Bhargava expects a run of such private placement deals in the coming few months after a slow start for Indian capital market transactions in 2012.
“You will definitely see some activity on this product,” he tells AsianInvestor. “It is unique and the banks had to spend a lot of time getting it sorted. I do think this is a product that will be quite prevalent for the next 18 months.”
Despite the fact that India’s equity market has rallied in 2012 after a disastrous 2011, public share sales require filing through securities regulator Sebi in a process that can take between three and six months.
In light of a challenging 2011, it is understood there would be few companies which would want to go through a public as opposed to a private process and take the risk of time. “People are going to say ‘the window is open, let’s do the deal that can be done the fastest,’” says Bhargava.
The understanding is that with 2012 expected to see continued volatility, people would not want to be subject to an extended regulatory public offering process that by the time a deal is ready to launch the markets may have gone south.
But Bhargava dismisses the notion that companies applying will likely be using the IPP process simply to access quick capital. “In those instances it is likely the stock price is going to be adversely affected and as a result it may not be a good idea to do an equity dilution,” he points out.
He suggests the firms most likely to apply for sales through IPP will be in industries including technology, financial services, infrastructure, real estate and consumer products – or those which are most in demand.