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SEBI’s New IPO and Preferential Issue Rules

21 February 20236 mins read by Angel One
SEBI’s New IPO and Preferential Issue Rules
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The calendar year of 2021 has been the one to note for India’s stock market as the total funds accumulated via IPOs have eclipsed all former records. Additionally, this year witnessed the debut of the highest ever public offering from Paytm (around Rs.18,000 crores). It may be, however, surpassed by the IPO of LIC when it goes public.

Moreover, this year witnessed a rise in new-age tech companies entering the public market in numbers. Backed by private equity firms across the globe, such organizations have principally focused on delivering goods for their stakeholders.

Throughout the year, the steady flow of IPO has kept SEBI on its toes and gradually highlighted the need for specific rule changes to protect investor interests. As a part of it, the Securities and Exchange Board of India implemented a set of rule changes. The alteration to preferential issue shares is a part of it.

A Closer Look into the Matter

Considering the need of firms to raise funds for strategic investments and acquisition, the new rule change will enable companies to use 35% of their equity proceeding of an IPO for this purpose. Out of this 35%, 25% can be used for unidentified objectives.

Previously, there was no such regulatory cap, but there were certain limitations that SEBI has relaxed slightly.

Along with that, SEBI plans to issue a limit on the proportion of shares that a current shareholder can issue during an OFS. This will depend on that individual’s stake in the company during a pre-IPO stage. Moreover, this regulation will be applicable to organizations that do not meet SEBI’s net worth or profitability criteria and have no identified promoters.

The purpose of this rule change is to bring more confidence to retail investors. This will allow current stakeholders to remain in the game post-listing.

On the flip side, experts believe this will limit the ability of current shareholders to take part in an offer for sale. This will prompt such investors to look for alternative ways to exit before listing. Hence, it will be a significant issue in the case of investors with limited fund life, and it can curtail the issue size.

A Look at the Other Rule Changes

Besides its guidelines associated with preferential share sale, SEBI has allowed credit rating agencies to monitor IPO proceedings. Companies registered with SEBI can be appointed for this purpose. The capital market regulator has now decided to monitor the total IPO proceeding through regular audits. Additionally, IPO proceedings marked as the general corporate purpose will now come under scrutiny, which was not the case earlier.

In case of book-built issues, SEBI ensured that a nominal gap in an IPO’s offer price is such that its cap price is at a minimal of 105% of its floor price. This proposed rule change came in the light of issuers not offering the ‘real price band’. This will now enable individuals to access different price points at which they can bid for an IPO.

SEBI has also proposed a lock-in period for anchor investors, which will come into action from 1 April 2022. Here, 50% of the anchor investors of an IPO will be locked in for 90 days. In contrast, the other half is for 30 days. Since anchor investors get a discretionary allocation, how these different lock-in methods will be applicable is uncertain. The intention is to keep investors for a longer tenure. However, this will not meet its objective if firms fail to hold on to their investors beyond a quarter.

The capital market regulator has also proposed a revised allocation method for non-institutional investors (individuals investing more than Rs. 2 lakh in an IPO). Under this new rule, one-third of this NII portion will be set aside for individuals investing more than Rs. 2 lakh but less than Rs. 10 lakh, and the remaining for applicants investing more than Rs. 10 lakh. Furthermore, the allotment here should be done through a draw as it is for retail investors. With this, SEBI aims to bring more transparency and ensure enough share allocation for comparatively smaller NII sections.

Parting Thoughts

SEBI’s effort to introduce transparency and improved governance is certainly commendable as it benefits investors to find better value in the stock market. Alternatively, experts believe in some cases, this will limit a firm’s ability to use the stock market to its benefit. Nonetheless, only time will tell how this move from SEBI will decide the future of India’s share market.

For any news and updates on India’s stock market, stay subscribed to the Angel One blogs.

Source: Livemint

Frequently Asked Questions

  1. What changes are prescribed to the price of preferential issue shares under this new rule?

The proposed alterations to the pricing of preferential issue shares are, for frequently traded securities, their floor price will depend on a shorter period, which is the volume-weighted average price of higher of 90 or 10 trading days. For infrequently-traded securities, this pricing will depend on an independent valuation.

  1. What will be the current lock-in period norm for a preferential issue to promoters?

The current lock-in period norm for a preferential issue to promoters mentions that 20% of it will remain locked for 18 months and the remaining is for six months.

  1. Will it be compulsory for businesses to clarify their GCP proceedings in this new system?

No, it is not a mandate for firms to mention their IPO proceedings used for GCP, but it will come under audit as prescribed by the regulator.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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