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SEBI Tightens IPO Norms, Brings in New Regulations

04 January 2022
3 minutes

2021 has undoubtedly been the year of IPOs with 63 companies going public this year. 

However, the raging bulls have highlighted a few loopholes in the listing process, especially for new companies. Some of these include highly volatile stock prices on the listing day and anchor investors exiting their position.

To address these gaps, SEBI (Securities and Exchange Board of India), held a board meeting on December 28, 2021, released a list of revised rules for companies launching their IPOs. The new rules will kick in from the onset of the next financial year in April 2022.  

Here’s a quick breakdown of these regulations.

Exit for OFS shareholders

Until now, promoters could sell their entire stake in the company via offer for sale (OFS). 100% exit by a promoter or a majority shareholder does not promote investor sentiment and may have been known to come across as unfavourable in the market. This holds especially true for companies that have been loss-making entities for a long time and see IPOs as their shot to exit.

To counter this, SEBI has mandated that promoters and/or shareholders in a company with over 20% shares cannot sell their entire stake in the company on the listing day. This has been capped to 50% of the shares.

Reservation of shares

Effective April 2022, 33% of shares currently allocated for non-institutional investors will be reserved for investors whose application is in the range of Rs 2 lakh and Rs 10 lakh. The remaining portion for non-institutional investors will be reserved for investors whose application exceeds the Rs 10 lakh mark.

The objective of IPO proceeds

An inherent trend seen in new-age companies and startups has been the urge to gather funding via IPOs for ‘inorganic growth’. The route of using these funds for inorganic growth has largely remained unclear, leading to ambiguity in the IPO and its objectives.

As a result, the SEBI has capped the funding to be scouted for inorganic growth initiatives to 25% of the total IPO proceeds if the company has not underlined specific acquisition or investment targets to lead the inorganic growth. In cases where such modalities have been clearly mentioned, 35% of the IPO proceeds can be used for the same.

Moving forward, SEBI has mandated that credit rating agencies will closely monitor the use of funds raised by a company via IPO. Until now, this was being done by Scheduled Commercial Banks and Public Financial Institutions.

Lock-in period for anchor investors 

Another point of concern for the SEBI has been the immediate exit of the anchor investors as soon as the 30-day lock-in period is over. The sudden exit brings down investor confidence and hampers the stock’s performance in the market. This was seen after the lock-in period of both Zomato and PayTM was over, after which the shares of the company tanked by 8.8% and 13%, respectively, on an intraday basis.

To overcome this, SEBI has increased the lock-in period from 30 days to 90 days to control the high volatility in the stock. Moreover, anchor investors will sell 50% of their allotment after 30 days. The rest, 50% can be sold only after 90 days.

Price band norms

The difference between the floor price and the upper price will be a minimum of 105%

Miscellaneous changes

  • Appointment or reappointment of a person in the company, including Managing Directors and Whole Time Directors, will now be done after the due approval of the shareholders.
  • Allotment for non-institutional investors will be done via ‘draw of lots’, which is currently being used for allotment for the retail individual investors.
  • Companies applying for IPOs will have to submit a valuation report made by an independent valuer if there has been a change in the allotment of over 5% after the issue has been fully diluted.

 

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