SEBI proposes fix for IPO lock-in issues on pledged shares, separate summary of key factors in IPO

SEBI proposes fix for IPO lock-in issues on pledged shares, and a separate summary of key factors in IPO

In a move aimed at easing the IPO process for companies by removing long-standing operational hurdles and making it easier for investors to understand the companies in whose IPO they are investing regulator has proposed to tweak regulations. The Securities and Exchange Board of India (SEBI) has proposed an amendment to the regulation related to IPOs, the Issue of Capital and Disclosure Requirements (ICDR) Regulations to allow pledged shares to be locked-in through a new, technology-enabled framework.

Under the current rules, the entire pre-issue capital held by persons other than promoters; except for certain specified shareholders—must be locked-in for six months from the date of allotment in an IPO. However, depositories are currently unable to mark pledged shares as locked-in, creating compliance challenges for issuers preparing to list.

SEBI said it has received multiple representations from market participants pointing out that issuers face difficulties when some of their pre-issue shares are pledged before filing for an IPO. Because such shares are freely transferable, shareholders may create pledges any time before the issue, and issuers often find it difficult to trace or coordinate with them during the tight IPO timelines. In some cases, issuers have also reported non-cooperation or untraceable shareholders.

One person aware of the discussion related to this policy told Moneycontrol that, “There were few instances of arm twisting by such shareholders with the issuer companies, hence this policy move was needed”.

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To address these challenges, SEBI has proposed a new enabling framework that will allow pledged shares held by non-promoters to be treated as locked-in, without disrupting the lending arrangements or delaying IPOs.

To deal with this issue, a new proviso will be added in the respective part of the ICDR Regulations, which will empower depositories to record such pledged shares as “non-transferable” for the duration of the lock-in period, based on instructions from the issuer. SEBI said that the depositories’ systems will automatically ensure that, after invocation or release of a pledge, the shares remain locked-in for the balance period.

Also, companies coming up with the IPO will be required to amend their internal rule book, called Article of Association or AoA to ensure that pledged shares are locked-in for the prescribed period, and that, upon invocation or release of the pledge, the shares continue to remain locked-in in the respective account of the pledger or pledgee.

It is also proposed that companies coming up with IPO, must notify all lenders and pledgees of the changes made to their AoA and include these details prominently in their draft and final offer documents (DRHP and RHP).

SEBI has received representations from the market participants highlighting challenges faced by the issuers in complying with the lock-in requirements pertaining to pre-issue capital held by persons other than the promoters, particularly in cases where pledges have been created prior to the IPO.

Small Kundali of the company coming up with the IPO

In another major proposal for the benefit of investors, SEBI has suggested doing away with the abridged prospectus, replacing it with a standalone Offer Document Summary aimed at improving retail investors’ understanding of IPO disclosures. A source said, this summary could be of 15-20 pages and in easy to understand format, compared to the 500-700-page DRHP.

Currently, every IPO application must be accompanied by an abridged prospectus at the RHP stage. However, SEBI noted that offer documents have become increasingly voluminous and complex, deterring retail investors from reading them and resulting in negligible public comments during the 21-day disclosure window.

SEBI paper noted, “This lack of participation is inconsistent with the regulatory intent, which seeks to encourage scrutiny of the offer document by both institutional and retail investors”. SEBI paper further stated,” The voluminous nature of the offer document may deter retail investors from reviewing such documents, thereby leading to lack of engagement and participation in the IPO process, including providing comments on the disclosures”.

To make disclosures simpler, focused and accessible, SEBI has proposed that the Offer Document Summary; a standardized and concise version of key information such as industry overview, major risk factors, financial highlights, objects of the issue and key performance indicators be hosted separately on the websites of the comping coming up with the IPO, SEBI, stock exchanges and lead managers.

The regulator believes that making such summaries easily available could reduce investors’ reliance on unverified sources like social media or grey market trends and promote informed participation in IPOs.

Also read: SEBI to rationalise offer document summary further, says Tuhin Kanta Pandey