Sebi tightens IPO process with slew of new norms

The Securities and Exchange Board of India (Sebi) on Tuesday announced tighter rules for companies raising capital from the markets, anchor investors, preferential allotments and changes in IPO (initial public offering) pricing norms.

The regulator has, for book-built issues, mandated a minimum price band of at least 105% of the floor price. Sebi believes several IPOs, in recent times, have had a very narrow price band with the difference being as low as Rs 1.

With a view to limiting the supply of shares by promoters or big shareholders, and in turn, minimising the volatility in the prices post listing, Sebi has tightened norms for the sale of share via an OFS (offer for sale) for companies without a track record. Shareholders who own more than 20% pre-issue cannot sell more than 50% individually or with persons acting in concert. Those holding less than 20% pre-issue cannot offer more than 10% under OFS. The changes appear to have been prompted by the sales of shares via OFS in 2021 as financial investors exited companies.

The norms for anchor investors have been changed; the existing lock in of 30 days shall continue for 50% of the portion allocated to anchor investor while for the remaining portion, a lock in of 90 days would be enforced starting April 1, 2022.

Sebi has also imposed a cap of 35% – of the IPO proceeds — that can be used for acquisitions where targets are not specified and for general corporate purposes. The regulator has also specified that the amount earmarked for such objectives where the issuer has not identified an acquisition or investment target, shall not exceed 25% of the amount being raised. No limits apply if the details are disclosed in the offer documents.

How the companies utilise the funds raised through IPOs will henceforth be monitored by credit rating agencies registered with Sebi rather than scheduled commercial banks (SCBs) and public financial institutions. Funds raised for general corporate purposes will also be monitored by the monitoring agency and the utilisation report will need to be placed before the audit committee every quarter rather than annually.

For frequently traded shares, the floor price for a preferential issue shall be higher of 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date or as per any stricter provision in the Article of Association of the issuer company. If the securities are infrequently traded, an independent valuer will prepare a report. If there is a change in control or an allotment of more than 5% of the post issue fully-diluted share capital, to allottees, there would be additional requirements. Also, where there is a change in control, a committee of independent directors shall be required to provide a reasoned recommendation along with their comments on all aspects of preferential issuance including pricing. The voting pattern of the committee shall also be disclosed to shareholders/public. The lock-in requirement for allotment up to 20% of the post issue paid up capital shall be reduced to 18 months from the existing three years. The lock-in requirement for allotment exceeding 20% of the post issue paid up capital shall be reduced to 6 months from the existing 1 year.

Suhail Nathani, managing partner at Economic Laws Practice, said: “Sebi’s new norms on public issuances is clearly designed to keep the large shareholders longer in the company. Norms on use of capital will take away opportunistic use of opportunities by promoters as well. That the regulator continues to refine use of funds raised under FCP, is a good thing as it enhances the checks and balances.”