Although high level of promoters' holding is considered to be a confidence booster; quality of corporate governance, indeed decides the fate of companies. If stake of the promoter group in the business is very high, the policies of the company might well be self-serving. In order to protect the interest of minority shareholders and increase the retail participation in the market; Securities and Exchange Board of India (SEBI) had amended SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Promoters of private sector listed companies have been directed to cut their stake down to at least 75% while public sector companies have been asked to attain minimum of 10% public participation in shareholding. SEBI made amendments to law back in 2010 and had given a window period of 3 years to companies to comply with norms. Although the deadline is nearing (June 2013); more than 87 listed companies have not yet complied with minimum public shareholding norms.

In light of this, markets might soon be flooded with offers soliciting bids for promoters' equity. Promoters have been given various options to dilute their stake which are:
 

• Offer for Sale (OFS);
• Institutional Placement Program (IPP) and
• And Follow-on Public Offers (FPOs)
   

When markets rally and stock prices command premium; promoters divesting their stake immensely benefit whereas investors end up bidding aggressively. Historically, fresh offers coming near the market top have rarely generated attractive returns. As per data published by SEBI, Out of scrips of companies listed between 2008 and 2011, 62% were trading below their issue price within 6 months of closing of the Initial Public Offer. This highlights the fact that promoters have been the better market timers while investors have rarely got a bargain.

Promoters of companies that are yet to comply with the norms might start off loading aggressively in coming days. The timing of these issuances might be concurrent to exuberant rallies in the market fuelled largely by global liquidity. Of late, markets have rallied in anticipation of possibility of further monetary easing by RBI. Cooling commodity prices which might reduce the import bill, have also aided.

PersonalFN is of the opinion that investors should be wary of such offers soliciting participation in equity. Whether main objectives of the move to attain 25% public holding (10% in case of a public sector company) can be achieved, depends on the route used by the promoter to divest stake. As indicated by SEBI, OFS and IPPs target lesser investors and are less transparent as compared to FPOs. Among those companies which have not yet complied with the norms, some public sector companies. It is noteworthy that higher Government holding offers no safety and investors shouldn't get carried away with government ownership. Investment in any company should be done only on its fundamental merits and identifying the potential of a company is often beyond the grasp of a retail investor. Citing this as a reason PersonalFN suggests that investors should meticulously check fundamentals and valuations of companies if one is applying directly. Those who are not well equipped to analyse the company on various parameters should leave this job to mutual funds. Mutual funds and insurance companies are to be given a quota of minimum of 25% when companies are off loading thorough IPP route. Mutual Funds can also apply to FPOs if their investment mandate permits them to do so. Moreover, they are managed by professionals and function in accordance to investment processes and systems laid by the fund house. It is wise to invest in equity diversified funds having consistent track record.

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