Ajay Tyagi’s tenure as chairman of the market regulator Securities and Exchange Board of India (SEBI) lasted four years and nine months and was mainly successful. He helped the market ecosystem whether the pandemic, managed record IPO mobilization, created a new risk-mitigation framework to protect millions of new investors joining the markets, and delivered technology advancements for cracking down on insider trading.
The Securities and Exchange Board of India (SEBI), according to Tyagi, is looking to reform listing regulations in the aftermath of a market frenzy for initial public offerings (IPOs) so that investors can figure out how corporations, particularly new-age tech-savvy startups, use IPO money.
What are the major Adjustments that have been proposed?
If a company intends to utilise the funds for acquisitions, it must disclose so. They do not have to name the target, but they must reveal the intent, the share of the IPO funds that will likely be used, the target’s business, and the acquisition timeline. Currently, corporations can set aside up to 25% of the fresh issue size for the general corporate purpose (GCP), which is a portion of the issue for which no specific goal is declared. If the purchase is unidentified in the offer’s goals, SEBI plans a cap of up to 35 percent of the fresh issue for acquisitions and GCP combined. Sebi may also tighten offer-for-sale requirements and lengthen the lock-in time for anchor investors.
What is the justification for the new rules?
The current fiscal year has seen a surge in public share sales, primarily by startups that are losing money and are engaged in unusual technology-driven enterprises, making it difficult for ordinary public investors to grasp how the companies use the money to produce revenues. Despite the fact that most of these new-age enterprises’ IPOs were massively oversubscribed, public investors may be unwittingly taking on too much risk by investing only on the basis of their popularity. Once implemented, SEBI’s latest suggestions will lessen such risks.
What does this imply for ordinary investors?
Investors will be able to see how their money is being used. This is especially important in the case of startup listings because new-age enterprises are built on cutting-edge, uniquely organised concepts, making it difficult for most investors to comprehend the dangers. If the major purpose of the IPO is to make future acquisitions, SEBI requires firms to explain the object of the issuance.
Will it result in increased accountability?
Yes. Currently, existing investors and promoters can monetize their stakes through an offer for sale. To boost investor trust, at least 20% of the promoters’ equity is locked in for 18 months after the IPO. SEBI currently intends to limit the amount of stock sales by substantial shareholders to 50%. The remaining 50% will be locked in for a period of six months. In addition, at least half of the anchor book will be reserved for investors who agree to a 90-day lock-in period after the IPO.
What does this entail for those considering an IPO?
Startups will need to be more open and transparent with investors about the nature of their firm and future goals. Currently, firms are not required to disclose how 25% of IPO funds will be spent, so they can use it whatever they like by placing it under GCP, which is not monitored. Some recent IPOs have been so enormous that the GCP amount becomes significant. SEBI now wants to monitor the GCP as well. It’s possible that the usage of GCP funds may need to be disclosed in a quarterly report.
Frequently Asked Questions (FAQs)
In an IPO online form, what does ‘DP name’ mean?
DP stands for Depository Participant in the IPO form. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the two depositories in India. Each depository has a network of depository participants, which serve as a conduit between depositories and issuers of securities. A depository participant (DP) is a financial institution, bank, brokerage house, or other entity that is registered with the Securities and Exchange Board of India (SEBI). A DP opens a demat account for an investor. On the form, you must enter the DP’s name as well as the DP’s ID.
Is it required to have a PAN number in order to apply for an IPO?
Yes, having a PAN is required to apply for an IPO. Investors must double-check their PAN after filling out the form, as any errors can result in the application being canceled.
What is the difference between a ‘Market Lot Size’ and a ‘Minimum Order Quantity’ for an initial public offering?
When a firm issues an initial public offering, it defines the minimum quantity of shares for which an investor can apply. The IPO bid lot, market lot size, or minimum order amount is what this is called. For example, if a company’s minimum order quantity is 100 shares and an investor wants to buy more than 100, the application can only be made in multiples of 100.