The Securities and Exchange Board of India (SEBI) is considering a reform of its initial public offer (IPO) regulations, three sources told Moneycontrol.
The capital markets regulator may cut down the requirement of 10 percent equity dilution for IPOs that have more than Rs 4,000 crores of post-issue equity capital.
SEBI may reduce the dilution requirement from 10 percent to 5 percent for larger IPOs, the sources said. Currently, if the post-issue capital is more than Rs 4,000 crore, the dilution is10 percent. For less than Rs 4,000 crores of post-issue equity capital, equity dilution required is 25 percent.
“Decreasing dilution from 10 percent to 5 percent has been discussed in a recent online meeting between SEBI chairman Ajay Tyagi and investors and industry players from the U.S. on October 27,” one of the sources, who is close to the development, told Moneycontrol.
In the Indian market, the largest number of foreign portfolio investors (FPIs) and about one-third of the total assets under custody of FPIs are from the US.
In India, in the current financial year as on November 9, the equity segment saw Rs 1,07,365 crores of foreign portfolio investment. Of this, 30 percent came from US-related financial market players.
“In this meeting (on Oct 27) investors told SEBI that larger dilution impacts the valuation of an IPO, especially when issue size is large. So, consider lower dilution for a larger issue, which the regulator is considering," the second source told Moneycontrol.
Amit Tandon, Managing Director of proxy advisory firm IiAS, told Moneycontrol, “The issue of minimum public float remains a matter of debate for over two decades. SEBI is right to look at it in terms of absolute size of the issue i.e. large issues should have a smaller percentage of shares being offered. But from an ongoing listing perspective, they need to insist on a minimum market cap or have a trading volume threshold.”
A third source, who deals with SEBI on IPO-related issues, told Moneycontrol, “In coming months large issues like Life Insurance Corporation or HDB Financial may hit Dalal Street. In LIC alone, the valuation is more than Rs 20 lakh crores, if 10 percent dilution is executed then they will raise Rs 2 lakh crores. Do we have the capacity to absorb such large issues?"
The sources spoke to Moneycontrol on condition of anonymity.
Arka Mookerjee, partner, J Sagar Associates, told Moneycontrol “The proposal to reduce the minimum dilution requirement is a move that will significantly help large caps like LIC. It remains to be seen if the 3-year window to comply with the 25 percent norm is also simultaneously relaxed.”
Pranav Haldea, Managing Director of Prime Database Group, told Moneycontrol “It is a good move if SEBI implements this 5 percent equity dilution norm. This norm will be helpful in increasing the number of IPOs. This measure is helpful in stopping unicorns from moving to overseas markets."
On the other side, investors complain of lower participation of retail investors as they don’t get shares during IPO placements. In the recent past, in IPOs like D-Mart, Bombay Stock Exchange, IRCTC and Ratnakar Bank Limited, retail investors did not get allotment as per their bids.
“SEBI may discuss this issue in the coming Primary Market Advisory Committee meeting and take a view on it," the first source told Moneycontrol.
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