Monday, April 21, 2008

SEBI Pricing Norms & Private Equity

When the market prices of companies in India are lower than what they were a few months ago, they would obviously be attractive to private equity funds and similar investors. However, the SEBI minimum pricing norms as set out in Chapter XIII of the SEBI (Disclosure & Investor Protection) Guidelines, 2000 are hampering deals in these market conditions, as this report by INDIA PE suggests.

The minimum pricing norms specify the higher of 26-weeks or 2-weeks average of the weekly high and low closing prices quoted on the specified stock exchange. Any issuance of shares by an Indian listed company cannot be below that price. While the 2-week average may track current market conditions, the 26-week average is likely to be higher than the current price in a falling market. Hence, private equity players will be forced by regulation to pay a price that is at a premium to current market price.

This, however, only applies to listed companies, which involve private investment in public enterprises (PIPE deals). In case of unlisted companies, since the shares do not have a ready market, companies have greater flexibility in pricing share issuances. Where the investor is a domestic person, the minimum price really is the par value of the share, as any price below that will result in issuance of shares at a discount which involves a cumbersome procedure to effect. Where the investor is a foreign person, the minimum price would be that determined by a valuer in accordance with the formula prescribed by the Controller of Capital Issues (CCI), which takes into account the financials of the investee company based on its past performance.

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