Earlier this month, the Securities and Exchange Board of India (“SEBI”) announced that controlling shareholders in the 105 Indian companies which have failed to meet the 25% free float requirement by the June 3, 2013 deadline now face regulatory sanctions. The Philippine Stock Exchange made a similar announcement, warning that the five listed firms still below the 10% minimum public ownership requirement may be in danger of being de-listed at the end of June 2013.
Such steps show that when it comes to free float requirements, regulators are getting serious. A variety of products promoting increased free float and liquidity are available in the Asian markets, some of the most popular of which we highlight here.
The SEBI story started in 2010, when the Indian market regulator first introduced its 25% free float requirement. The June deadline (or August, for government-owned entities) triggered a wave of follow-on issuances in the first half of this year, many using the Offer for Sale (“OFS”) mechanism set out in a July 2012 SEBI circular and subsequent January 2013 amendment.
The OFS mechanism, which can be likened to a block trade by auction, allows promoters of listed companies to dilute their holdings in a transparent manner through an exchange-based bidding platform. Sellers may set the floor price at their discretion, and shares are allocated to successful bidders either pro rata based on a single clearing price or at multiple price levels with preference given to higher bid levels. The speed to market and pricing transparency of the OFS product has made it a popular capital raising choice for several major private sector and government-owned vendor sales in the last quarter of 2012 and first half of 2013, including the sale of a US$2.14 billion stake in NTPC Limited, India’s largest state-owned power generation company (on which our firm advised).
Farther east, the Philippine Stock Exchange (“PSE”) reportedly has assessed its minimum public ownership program as “successful.” In 2011, the PSE raised its minimum public ownership requirement from 30% to 10% to improve liquidity and increase public participation in the capital markets. At the end of 2011, 45 PSE-listed companies were labeled non-compliant; in a recent announcement, only five remained in danger of de-listing. While some companies had voluntarily chosen to de-list, most chose the follow-on offering route, including under the top-up placing structure pioneered in Hong Kong.
In a top-up placing, the vendor sells a block of its secondary shares to investors. The same vendor then subscribes to a “top-up” amount of primary shares from the issuer. This results in an increased free float while allowing issuers to raise funds quickly. In late 2012, we advised on a US$151 million top-up placing by SM Investments Corporation (“SMIC”), including a Rule 144A tranche to US qualified institutional buyers. At the time, the SMIC top-up placing was one of the first of its kind in the Philippines. Since then, the Philippines market has seen a steady stream of vendors choosing the top-up placing structure, including the country’s largest equity sale to date, LT Group’s US$912.2 million private placement.
India and the Philippines aren’t alone in taking steps to encourage increased liquidity and capital raisings in the region. While Mumbai and Manila have chosen the stick, Indonesia has thus far opted for the carrot, with tax benefits offered to companies with a free float over 40%, subject to other regulations. This policy has helped to incentivize Indonesia capital raisings, many structured as rights issues with concurrent placings by major shareholders. Some capital raisings have been structured as “re-IPOs,” which allow the issuer to avoid triggering preemption rights while still allowing both a fully-marketed offering by the controlling shareholder and an optional issuance of new shares by the issuer. Perhaps the most well-known example of an Indonesian re-IPO this year thus far was CVC’s US$1.3 billion sell-down of its stake in Matahari Department Store. In 2013, we have advised on three ongoing rights issues with concurrent placings, each with a somewhat different offering structure but all with the ultimate intention of an increased free float.
While these products are attractive capital raising opinions, they are not without risks and challenging execution issues. In particular, great care must be taken when marketing these products to balance investor education with the company’s reporting obligations as a listed company. In some jurisdictions, transactions involving a controlling shareholder and the issuer may be subject to additional restrictions governing related party transactions.