MC EXCLUSIVE SEBI may allow IPO of big companies with less stake dilution

SEBI May Allow Big Companies IPO with less stake dilution.

The Securities and Exchange Board of India (Sebi) is considering a proposal that could allow large companies to launch initial public offerings (IPOs) with a smaller issue size and hence lower stake dilution. This move is aimed at making it easier for well-established and cash-rich businesses to list on stock exchanges without being burdened by existing minimum public shareholding norms.

Sebi is now considering reducing the initial dilution requirement for such large companies to 2.5 percent plus Rs 2500 crore. A source said, “This change could offer more flexibility to promoters and existing shareholders, especially when the company does not need to raise a large amount of capital through the IPO”.

This development is part of Sebi’s ongoing efforts to improve the Ease of Doing Business and make the IPO process more flexible and practical, especially for large conglomerates and public sector undertakings (PSUs). According to second source familiar with the matter, “the idea has been discussed internally and may soon be released as a consultation paper for public feedback”.

The same source said, the market regulator is also looking at tweaking the current market capitalisation slabs used to determine the minimum public offer size. As per the current norms, companies with post-IPO market capitalisation between Rs 4,000 crore and Rs 1,00,000 crore must meet specific offer size and dilution requirements. Sebi may revise the lower end of this range to Rs 50,000 crore.

Currently, Sebi rules require companies to dilute a minimum percentage of their stake depending on their post-IPO market capitalisation. For companies valued at Rs 1,00,000 crore or more after the IPO, the mandatory dilution is 5 percent, along with a requirement to raise public shareholding to 10 percent within two years and 25 percent within five years of listing.

One of the main concerns raised by industry stakeholders is that many large companies, especially those with strong balance sheets and sufficient cash reserves, do not require significant funding. However, they are still required to float large IPOs to meet the current minimum dilution rules. This can discourage some companies from going public or delay their listing plans.

A second source said, “Public sector undertakings (PSUs) have also faced challenges under these rules, as they may not need fresh capital but are still expected to meet strict public shareholding norms”. He further said, “these constraints have prompted Sebi to review the existing framework and explore more practical options”.

Another issue highlighted is the negative market reaction that often follows news of stake dilution. When investors learn that a company is required to offload a certain percentage of its stake to meet minimum public shareholding norms, it can lead to a drop in the company’s stock price—even when there is no change in its financial fundamentals.

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An email seeking comments from Sebi did not elicit any response.

Currently, under the Securities Contracts (Regulation) Rules, 1957, companies with a post-IPO market capitalisation of Rs 1,600 crore are required to dilute 25 percent of their stake. For companies in the Rs 1,600 crore to Rs 4,000 crore range, they must meet the 25 percent public shareholding requirement within three years of listing. Companies valued between Rs 4,000 crore and Rs 1,00,000 crore must dilute at least 10 percent at the time of IPO and also meet the 25 percent public shareholding within three years. The highest slab, for companies valued at Rs 1,00,000 crore and above, requires a 5 percent dilution plus Rs 5,000 crore at the time of listing, with further shareholding targets set for later years.

These rules were last amended in June 2021. Sebi’s fresh look at the framework could open doors for more large companies to list smoothly and efficiently.

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