2021 has been a remarkable year for India’s stock market as the total amount gathered from IPOs has eclipsed all previous records. Moreover, this year saw the highest ever public issue to float in the market from Paytm (about Rs. 18,000 crores). The good news is that this record may be overthrown soon when LIC of India introduces their public issue.
Even after all these highlights, controversies have been a regular occurrence. The introduction of IPOs, usage of its proceeds and many other facets of taking a company public have been called under question, as organisations have twisted the rule book to their advantage.
Securities and Exchange Board of India, the organisation responsible for overseeing the capital market of India, has taken note of such ill-practices. Resultantly, they are now conducting necessary reforms to safeguard the financial interests of common investors.
SEBI Plans to Bring Significant IPO Reforms
When the regulatory body meets on 28 December 2021, they are planning to greenlight a set of regulation changes in the primary market. This alteration is likely to include –
- Increasing the lock-in period for anchor investors and relaxing the lock-in requirements of promoters
- Putting restrictions on the usage of IPO proceeds for unidentified objectives by the new-age technology firms
- Stricter rules on observing IPO proceeds
- Fixing the allocation of shares to different investor segments and its price band
- Relaxing the current pricing rules for preferential shares
A Detailed Explanation of the IPO Reforms
The primary factor that is behind these regulatory changes is that SEBI views funds raised through IPOs against unidentified acquisitions as ambiguous. The regulatory body believes that this risk is further enhanced when a large portion of the fresh issue is allocated for this purpose.
Moreover, to understand the general public’s feelings, SEBI issued consultations papers in November this year. However, the responses received from citizens have not been made public yet.
Usage of IPO proceeds
The Securities and Exchange Board of India will propose a threshold of up to 35% of the fresh issue IPO proceedings to fund inorganic growth and general corporate purposes. This is only applicable if the acquisition target is not identified in IPO objectives.
SEBI board will also discuss altering the rules of monitoring the usage of funds under GCP. The new proposal will require companies to disclose GCP usage in their quarterly monitoring agency report. Currently, there are no such provisions.
Furthermore, SEBI will also take into account the decision to increase the lock-in period for anchor investors. As stated above, it will increase from the current 30-days to 90-days system.
The reason behind this move is to increase confidence among other investors. In the present scenario, organisations can allocate 69% of their total shares to Qualified Institutional Buyers (QIBs) and to anchor investors on a discretionary basis. The anchor investor allotment is made public the day before a public issue goes live.
This new proposed rule change will also include revising price bands for IPOs. SEBI has plans to introduce a minimum price band for every IPO. The upper limit here will be at least 5% higher than the floor price.
Current data from different IPOs has shown how the price band is now a matter of perception rather than reflecting the actual value of a company. SEBI has noticed price bands as narrow as Rs. 1-3 in some public issues.
According to market experts, with this process, SEBI aims to bring more dynamism and promote price discovery. QIB feedback and institutional marketing play a major role in narrowing the price band. Hence, introducing this minimum threshold system will help in price discovery during opening and closing periods.
Currently, companies follow either the fixed-price or book-building method for an IPO. In case of a fixed-price system, the issuer offers a single rate, which is mentioned in the offer documents. Alternatively, a book-building process has a price band with an upper limit that is not more than 20% more than the floor.
The SEBI will also have a discussion on revamping the rules associated with the preferential issue. They will aim to bring a more relaxed pricing norm and a lock-in period of promoters to encourage sell of shares through this route. Additionally, companies need to gather a valuation report whenever there is a shift in control due to the issuance of preference shares.
Along with this, SEBI has also proposed lowering the ‘lookback period’ for pricing the preferential shares. The regulator aims to bring it down to 60 days from 26 weeks. Moreover, the lock-in period for promoters may be reduced to 1.5 years from 3 years, and it is down to 6 months from 12 months for other investors.
SEBI’s attempt to bring transparency and better governance is undoubtedly laudable as it helps investors to find value in the market. On the other hand, experts think that certain regulation changes can also limit a company’s ability to utilise the market to its advantage. Additionally, the chances of facing regulatory actions also increase. Nonetheless, time will tell how these rule changes will shape India’s stock market.
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Frequently Asked Questions
- When will these new rule changes be implemented?
SEBI has not announced any tentative dates from when these changes of rules will be applicable.
- Is it mandatory for companies to explain their GCP proceedings in the current system?
No, it is not mandatory for companies to explain their GCP proceedings in the current system.
- Does a company need to specify its usage of fresh-issue IPO proceeds under this new rule change?
Yes, a company needs to specify its usage of IPO proceeds from the fresh issue equity shares under this new rule.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.