LIC, the country’s largest life insurance company, has sought an exemption from the regulator Securities and Exchange Board of India (SEBI) for its upcoming public offering. Any company that plans on floating an IPO has to deposit an amount equal to 1% of the issue size. The security deposit, which is used to counter fraud, is returned to the company after the IPO.
Security Deposit is a Challenge in LIC IPO
In February 2022, the state-owned insurance corporation approached the Sebi ICDR for an exemption from depositing one percent of the amount of IPO size that is issued for subscription to the public as a security deposit. This was mentioned in the DRHP.
It is believed that government-owned insurer LIC may have to deposit around Rs. 500 to Rs. 800 crores with the stock bourses. The 1% deposit might seem like a big mountain of a challenge for the company.
The Purpose of Deposit
The purpose of the deposit is to protect the stock exchanges from any fraudulent activities by the companies seeking to launch the initial public offer. It is expected that LIC will raise around Rs 50,000 to Rs 90,000 crore through fresh funds.
Since the government holds the majority stake in LIC, there’s no reason to worry about the promoters misappropriating funds. This deposit is anyway meant to be refunded back to the company after its share sale.
SEBI ICDR Regulation
As per the SEBI ICDR Regulation 300(1), the company deposits the sum of 1 pc pf issue size one day before an anchor allotment. This deposit is typically kept with the exchanges until the final allotment is complete. This rule aims to prevent fraudulent activities during an IPO. It safeguards investors from getting harmed by any fraud during the IPO.
As per the rules and regulations laid thereunder, the Sebi can provide specific exemptions to certain issuers. But as of now, the Sebi has not responded to the LIC’s request to exempt the deposit requirement.
Security deposit is a requirement for any IPO. It is required to ensure that the investors’ interest is protected. Sebi may consider waivers for certain conditions provided that the issuer can justify the reasons for doing so.
Securities and Exchange Board of India has granted an exemption to Life Insurance Company from providing consolidated financial statements of its subsidiary companies. Through a letter dated January 28, Sebi granted a one-time exemption to the insurer LIC. The company also asked for an exemption to disclose the consolidated number of creditors, as mentioned in the draft prospectus.
What is the requirement for a deposit?
Every company planning to launch an initial public offering in the Indian stock market has to float it through the stock exchanges. The exchanges seek deposits from the company. This deposit is fixed at 1% of the size of the IPO. This requirement has been brought to discourage any fraudulent activities that companies might undergo.
What are ICDR Regulations?
ICDR stands for Issue of Capital and Disclosure Requirements. The SEBI ICDR Regulations deal with certain regulations that are imposed on the company launching the IPO. As per these regulations, the company is required to pay a deposit before floating its offer in the market. The issue price of the share is also required to be computed under the rules and regulations mentioned in the SEBI ICDR Regulations.
Can Sebi make certain exemptions for companies to compromise ICDR regulations?
Yes, the Sebi has authority to make certain exemptions for the companies in relation to ICDR regulations provided that the company provides valid reasons to the board as to why the specific adaptations need to be made. If the Sebi is convinced, then specific alterations can be made.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.