SEBI Proposes Stricter IPO Norms

Ashish M. Shaji

23 Nov, 2021

The Securities & Exchange Board of India proposed to tighten the rules governing IPOs with a view to ensure more transparency and accountability. The capital markets regulator has sought public comments on the changes proposed (IPO norms) by it till the end of this month, after which it will firm up the rules. The proposal comes at a time amid a record Rs. 1 trillion plus mop up through IPOs this year, most of which came from new age and loss-making companies.

Stricter IPO Norms: Changes Proposed by SEBI

SEBI has proposed for a cap on the amount that companies and especially start-ups can raise for inorganic growth initiatives and on the quantum that the existing shareholders can offload in the IPO. SEBI has also proposed to raise the lock-in period for anchor investors and has also called for the monitoring of the IPO proceeds. Anchor investors are those institutional players who subscribe to Initial Public Offers (IPOs) just a day before the issue opens for public. They are provided confirmed allotment as they put in large bids. Hence the SEBI proposal focuses on 4 key areas:

• 35% Limit for Inorganic Growth Initiatives, GCP;
• Tougher Disinvestment for significant shareholders;
• Lock in for Anchor investors;
• Use of funds under general corporate purpose (GCP) to be monitored and disclosed.

Let’s look at the changes proposed by SEBI in detail-

• A maximum of 35% of the IPO issue can be used for inorganic growth initiatives & general corporate purpose. As per the current rules, companies can raise up to 25 per cent of their IPO proceeds under the head- ‘general corporate purpose (GCP)’. The cap will not apply in case the companies are more specific about their plans when filing their offer document.
• The regulator said that lately, in some draft offer documents, issuer companies are proposing to raise funds for objects wherein the objects are termed as Funding of Inorganic Growth Initiatives, which includes future acquisitions, investment in new business initiatives and strategic partnerships by the company without identifying the target acquisition/specific investments that is proposed to be deployed out of issue proceeds… raising of funds for an unidentified acquisition causes some amount of uncertainty in the IPO objects. Start-up IPOs like Zomato and Paytm had stated objects of the issue to be funding acquisitions and growth initiatives.
• In case of IPO of firms without any identifiable promoters, a share sale by significant shareholders would be capped at 50% of their pre-issue holding. An investor holding more than 20% would be deemed to be a significant shareholder. The SEBI expressed concern over high dilution by existing shareholders in the IPO.
• SEBI said that such shareholders will face a lock-in period of 6 months after the sale of share which may include venture capital funds, Alternate Investment Funds. This move is expected to ensure more skin in the game and bring in confidence among investors, especially if it is a loss-making company.
• Minimum 50% of the anchor investors will be those who wish to stay invested for minimum 90 days instead of the current lock-in of 30 days. SEBI felt that a longer lock in for anchor investors will inspire more confidence to other investors.
• SEBI has also proposed that the issue proceeds earmarked should be brought under monitoring.
• Further, the use of the General Corporate Purpose (GCP) amount from the issuer company may have to be disclosed in the quarterly monitoring agency report. SEBI^[1] had observed that companies are coming up with issues that are large in size. Therefore with a larger issue size, the GCP amount becomes highly substantial.
• Hence every company that raises fresh proceeds in the IPO needs to appoint a monitoring agency where the agency will oversee if the funds are used for the purpose provided in the offer document. Currently, the GCP component is kept out of such monitoring.

Potential Impact of the Proposal (IPO Norms)

If these changes are implemented, then it can have the following impact:

• Companies will be required to be more specific in terms of what they wish to do with the IPO money;
• Existing shareholders will need to show more involvement;
•  Anchor investors also need to show long commitment;
• IPO proceeds will undergo enhanced monitoring.

Conclusion

SEBI has proposed these IPO norms so that the regulations on capital and disclosure requirement can be tightened as India witnesses record fundraising via IPOs. SEBI had issued a consultation paper on November 16 and notified four key areas which require changes. SEBI has provided time till the end of this month for public comments.

Read our article:All you need to know about Special Purpose Acquisition Company (SPAC)