IPO Norms: All you need to know about the latest SEBI regulations

4 mins read

The regulator of the securities market SEBI always oversees the market functioning and if needed steps in with a slew of measures to protect the integrity of the stock market and safeguard the interests of investors. Here is one such instance where SEBI tightened the norms.

With over 60 companies going public, 2021 was an IPO frenzy year in India. The IPO boom of 2021 also shed some light on matters such as the high volatility of stock prices of the companies that went public recently and other regulatory gaps that led SEBI to revise some rules of IPO and set new regulations that will come into effect from 01-Apr-22. Let us look at the existing rules and the new rules that will replace them, and the possible reasons behind the changes.

Norm Previous Rule New Rule Reason
Objective of IPO proceeds

 

The usage of proceeds of IPO was not defined
  • If the company has not identified any acquisition or investment target, the amount for the same cannot exceed 35 percent of the total amount being raised.
  • If the acquisition target is not identified, the amount cannot exceed 25 percent of the total amount raised
The proposal to raise fresh funds to promote inorganic growth initiative had remained ambiguous
Utilisation of IPO proceeds Monitored by Scheduled Commercial Banks or Public Finance Institutions Credit rating agencies to monitor the use of IPO proceeds till 100 percent of it is spent. To prevent the misuse of funds raised through IPO
Lock-in period for Anchor Investors A lock-in period of 30 days from the date of allotment. Anchor investors can sell half their shares after the 30-days lock-in and can sell the remaining shares only after 90 days from the date of allotment The immediate exit of Anchor investors after 30 days had brought down the investor confidence leading to the high volatility of stock prices. To control the high volatility, this measure is implemented
OFS shareholders No limits on sale of shares by existing shareholders Existing shareholders,

  • holding more than 20 percent of pre-issue cannot offer more than 50 percent of their shares in an IPO.
  • holding less than 20 percent of pre-issue, cannot sell more than 10 percent of their shares.
To prevent the use of IPO route to exit by promoters or majority shareholders
Reservation for Non-Institutional Investors (NIIs), commonly referred to as HNIs 15% of the issue size in an IPO with no further bifurcation
  • ⅓ rd of the shares currently allocated for NIIs will be reserved for applicants with an application size of more than Rs 2 lakh and up to Rs 10 lakh
  • ⅔ rd of the allocation will be reserved for investors whose application exceeds Rs 10 lakh
To create a sub-category for individual investors who are no longer small investors, but don’t exactly fit the tag of an HNI either.
Price band Companies going public could set a price band as they chose. A minimum 5% gap between the floor price and upper price band To ensure proper price discovery

 

Other notable changes in the IPO norms as per SEBI guidelines are,

  • A valuation report made by an independent valuer has to be furnished if a company wants to allot more than 5% shares to any entity.
  • Allotment for NIIs would be done through ‘draw of lots’, as is currently done for retail investors.

The new regulations brought by SEBI to address some of the regulatory gaps may also help in bringing stability post IPO issue and rationalizing the offer prices. Some of the new norms to control the volatility in stock prices and increase transparency are certain to boost investors’ confidence in IPO. With new IPO norms in place, are you ready to invest in IPOs coming your way in 2022?

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