The Securities and Exchange Board of India (SEBI) on December 28 cleared the rules for tightening initial public offerings (IPOs) near the end of a year in which companies raised a record Rs.1.2 lakh crore in first-time share sales.
These rules will address gaps like conditions for the objective of IPOs, utilisation of proceeds from the share sales, price bands, anchor investors’ lock-in period and the size of the stake a majority shareholder may sell on listing day.
At present, shareholders can sell their entire shareholding through an offer for sale, but the market regulator has now mandated that shareholders who hold 20 percent or more cannot exit more than 50 percent of their stake on listing day.
In order to stabilise share prices of newly listed firms and prevent potentially huge losses for retail and high net-worth investors, SEBI increased the lock-in period to 90 days from 30 days.
The regulator has also tightened disclosures around the objective of IPO proceeds.
SEBI had earlier observed that start-ups planning to list on exchanges state their objective for funding inorganic growth initiatives.
“The amount so earmarked for such objects where the issuer company has not identified acquisition or investment target, as mentioned in objects of the issue in the draft offer document andthe offer document, shall not exceed 25% of the amount being raised by the issuer,” SEBI said in a statement.
It also tweaked valuation norms when there is a change of control. SEBI said additional requirement for a valuation report by a registered independent valuer will be required in case of change in control or allotment of over 5 percent of fully diluted, post-issue share capital of a company to allottees acting in concert.
The tightening of IPO rules precedes a year in which IPOs, led by Life Insurance Corporation of India’s initial stock sale, are expected to raise Rs 1.5 lakh crore.
This year, as many as 63 companies have raised Rs 1.2 lakh crore through IPOs, nearly double the previous best of Rs 68,827 crore raised by 36 companies in 2017, Press Trust of India reported in an analysis of data available with stock exchanges.
The regulator tweaked price band norms as well.
“In case of book built issues, a minimum price band of at least 105 percent of the floor price shall be applicable for all issues opening on or after notification in the official gazette,” the statement said
SEBI said the use of proceeds from an IPO will be monitored by registered credit rating agencies.
The market regulator also approved factors to be considered for determining the floor price for all preferential issues, provisions related to the appointment or reappointment of directors who fail to get elected and revised the allocation procedure for non-institutional investors.
For determining a preferential issue’s floor price, SEBI said: “For frequently traded security, the floor price for preferential issue shall be higher of 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date or as per any stricter provision in the Article of Association of the issuer company”.
“For infrequently traded security, the valuation report by a registered independent valuer shall be required”, the release added.
SEBI also reduced lock-in provisions for preferential issues for promoters and non-promoters. The lock-in requirement for allotment of up to 20 percent of the post-issue capital will be reduced to 18 months from the existing three years and for over 20 percent of the post-issue capital will be reduced to six months from the existing one year. For non-promoters, the requirement for allotment will be reduced to six months from one year.
Directors who fail to get appointed or reappointed will be able to assume positions only with the approval of shareholders, the regulator added.SEBI said one-third of the allocation will be reserved for non-institutional investors (NIIs) with application sizes ranging between Rs2 lakh and Rs10 lakh; two-thirds will be reserved for application sizes of over Rs 10 lakh.