Amid IPO Rush, SEBI Proposes Strict Rules

Source: ClearTax Chronicles

Market regulator SEBI’s proposal comes as India is set for a record year for initial public offerings (IPOs)

Edited by Sanskar Tiwari

India’s markets regulator proposed tightening rules on how companies can spend money raised through initial public offerings and how quickly big investors can exit, a move aimed at protecting smaller shareholders looking to buy into a flurry of listings by new-age technology firms that are driving the country’s equity markets to new highs.

The SEBI proposed to limit a maximum of 35% of proceeds for acquisitions and unspecified strategic investments. It also proposed to lock in for longer so-called anchor investors to prevent a quick post-listing exit. The suggestion comes amid a slew of new-age technology companies that are filing draft papers to raise funds through initial share sales.

Here are some of the changes proposed by SEBI:

  1. As much as 35% of the IPO issue can be used for inorganic growth initiatives and general corporate purpose
  2. Technology companies often need to raise funds for expanding into new markets, acquiring customers or other firms, objectives that are often broadly lumped under the category of ‘Funding of Inorganic Growth’ that create uncertainty for investors, the regulator said
  3. For the IPO of firms with no identifiable promoters, a share sale by significant shareholders will be capped at 50% of their pre-issue holding. Any investor holding more than 20% will be deemed a ‘significant shareholder.’
  4. Such shareholders will face a lock-in period of six months after the share sale. This may include venture capital funds, alternate investment funds, SEBI said
  5. At least 50% of the anchor investors should be those who are willing to stay invested for at least 90 days. This compares with 30 days currently.
  6. The regulator has proposed that the issue proceeds earmarked under should be brought under monitoring.
  7. The issuer company’s utilisation of the GCP amount may need to be disclosed in the quarterly monitoring agency report. The regulator observed that companies are coming up with very large issues. Thus, with a larger issue size, the GCP amount also becomes very substantial.
  8. The proposals from Sebi follow the Reserve Bank of India’s decision last month to cap lending for investments in new listings at 10 million rupees per borrower, effective April 1, 2022.

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Source: Bloomberg Quint