SEBI Is Tightening the Rules of IPO Proceeds Utilisation

India’s capital market regulator Securities and Exchange Board of India, has proposed the utilisation of IPO funds. The target here is to limit the funds raised via IPOs that firms can use for the purpose of mergers and acquisitions unless they are clearly stated beforehand. Additionally, monitoring the funds reserved for general corporate purposes is another point of concern here.

In its official statement, SEBI mentioned that generating funds for unidentified takeovers leads to ambiguities in a public issue’s objectives. The regulator has asked for comments from various stakeholders on this proposal by 30 November 2021.

What’s in the Proposals?

In its proposal papers, the capital market regulator has mentioned a combined limit of 35% of the fresh issue shares companies can use to fund inorganic growth prospects and meet general corporate purposes. However, it is only applicable where future acquisitions or strategic investments are not present in the objectives of an offer.

Contrarily, such limitations are not applicable in cases where proposed takeovers or investments are mentioned in the IPO papers. Moreover, companies need to submit related disclosures and details with their offer.

The reason for imposing such restrictions is largely because technology companies going public in recent times are tagging their objects as ‘funding inorganic growth initiatives. Moreover, since companies are going public with high-value IPOs, the amount allocated here also becomes substantial.

Now, this initiative can include acquisitions, investing in new ventures, making strategic partnerships, etc. However, the organisation that is on the target list are not specified, which lowers transparency.

Furthermore, SEBI has also mentioned that companies mentioning the purpose of this issue proceeds should complete it under supervision. Companies also need to disclose their GCP spending in their quarterly report. In its official statement Securities and Exchange Board of India has mentioned that considering the size of public issues going live, utilisation and monitoring of these funds are crucial.

What’s the current regulation?

As per SEBI’s current regulations, the GCP amount should not go beyond 25% of the amount generated by a company. Additionally, there are no provisions for monitoring the spending of this amount.

Changes Are Due in the Offer for Sale

In its recent proposal, SEBI has also proposed changes regarding OFS of companies. It says, in cases where there are no identifiable promoters, the selling of shares by major stakeholders (individuals owing more than 20%) is limited to 50% of their pre-issue holdings.

Moving ahead, for such major stakeholders who are selling via an offer for sale, their post-issue shares can be under lockdown for 6 months following the date of allotment of an IPO. This is applicable for every stakeholder, be it venture capital, alternative investment funds, category I and II investors.

The current regulations

Under current regulations, companies with identifiable promoters need to maintain Minimum Promoter Contribution (MPC) to a minimum of 20%. Following an initial share sale, this MPC must be locked for 18 months. The aim here is to keep promoters involved and increase confidence among general investors approaching a public issue.

On the other hand, companies with unidentifiable promoters have no such obligations.

Bottom Line

Since India is witnessing a one of a kind IPO season this fiscal year, regulatory bodies are now focusing on implementing stricter norms. This will rectify the gaps in regulations in the current system and put a better system in place for the future.

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Frequently Asked Questions

1. Are there any alterations in the anchor investment?

Yes, SEBI, instead of increasing the lock-in period for this category from 30 days, has mentioned that more than 50% of the anchor book can be available for investors who will agree to a 90-days or more lock-in period.

2. What is the total amount raised via IPOs in the first nine months of 2021?

The total amount gathered via IPOs in the first nine months of 2021 stands at $9.7 billion. It is the highest in last 20 years in a similar period.

3. What is the mainboard and SME fundraising amount through IPOs for 2021?

The mainboard and SME fundraising through IPOs for 2021 includes Rs. 78,520 crores and Rs. 551 crores, respectively.