The Securities and Exchange Board of India (SEBI) should take steps to simplify the rules surrounding initial public offerings (IPOs), including clearance and underwriting timelines, to ease the supply situation within the equity markets, said Raamdeo Agarwal, Chairman of Motilal Oswal Financial Services.
“Such actions would undoubtedly have a positive impact on the Indian economy,” Agarwal told Moneycontrol in an exclusive interview on the sidelines of the 19th Global Annual conference.
He emphasised that SEBI should facilitate the underwriting process by allowing banks and brokers to function as underwriters, rather than being confined to roles of lead bankers.
Currently, the underwriting rule only comes into play when the minimum threshold of the IPO, excluding the anchor book, remains unsubscribed.
‘Streamline timelines’
In terms of timelines, the Motilal Oswal Financial Services chairman suggested that the process for granting clearance to go public should be streamlined to a concise one-month period. Currently, SEBI takes around four to six weeks to approve a Draft Red Herring Prospectus (DRHP) when no major changes are required. Following SEBI approval, it takes another four to six weeks to bring the IPO to the market. After submitting the Red Herring Prospectus (RHP), it takes an additional week to obtain SEBI's approval.
Additionally, he proposed a downward revision of the minimum public holding from the established 75 percent to 65 percent. Presently, for a company to be listed, public shareholding is required. As per this rule, promoters of Indian listed companies (excluding public sector undertakings) must hold less than 75 percent stake.
Regulators, capitalizing on the present opportunity, should also focus on ensuring increased paper supply, primarily through greater involvement from private equity sources, he said, adding, “This strategic move would simultaneously provide a chance for divesting holdings in public sector undertakings.” He warned if regulators do not step in to facilitate this supply, promoters might utilize the current market conditions to divest their stakes at significantly higher valuations.
Expensive valuations
According to Agrawal, these proactive measures by regulators are essential to keep valuation in Indian equity markets under check. At present, Indian equity markets rank among the most expensive globally, second only to Japan. The Japanese market commands a price-to-earnings ratio of 26 times, while India boasts a multiple of 22 times.
Significantly, the SEBI board recently approved a proposal to reduce the timeframe for listing shares in IPOs to three days, down from the previous six days, starting from the date of issue closure. This revised T+3 timeline will be implemented in two phases. The new listing timeframe will be voluntary for all public issues opening on or after September 1, 2023, and mandatory for issues coming into play on or after December 1, 2023.
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