SEBI objects to use of IPO proceeds for paying back promoter loans

The IPO clearance of these companies is facing delay as SEBI is expecting these companies to change their use of proceeds or repay promoter loans using other financing routes, sources said.

Markets regulator the Securities and Exchange Board of India (SEBI) has objected to companies using share sale proceeds to repay loans availed from promoters or promoter entities, people familiar with the development said.

SEBI's objections have delayed several initial public offerings, with companies now being asked to change their use of proceeds or repay promoters using other financing routes, the people said, requesting anonymity.

“Under the capital market regulations, there are no norms that restrict a company from using the IPO proceeds to repay loans taken from the promoter or promoter group entities. But SEBI, as of now, is not willing to clear these documents, although there are only a few cases which are stuck because of this issue,” one of the people cited above said.

In documents in support of their IPOs, companies have to spell out what they plan to do with the funds raised.

In some cases, SEBI has asked the companies to refinance the promoter loans from financial institutions and then use the IPO proceeds to repay those financial institutions instead of directly repaying the promoter loan from the IPO money, the source said.

A spokesperson for SEBI didn't immediately respond to emails seeking its response.

It is a common practice for promoters to fund businesses not just through equity investments but also through loans such as inter-corporate deposits or loans or, in the case of an Indian subsidiary of a foreign company, the parent firm using the external commercial borrowing route to fund the India operations.

Merchant banks have approached SEBI to reconsider its stand, and a meeting is likely this week to find ways to resolve the matter, a second person said.

The person added that in the past, the regulator cleared such uses of IPO funds, though there are few precedents.

Afcons Infrastructure IPO

As reported by Moneycontrol, Shapoorji Pallonji group’s flagship construction firm, Afcons Infrastructure, dropped its plans to use part of IPO proceeds to repay a loan taken from a related party, Shapoorji Pallonji Finance Pvt Ltd, which is categorised as part of the firm’s promoter group.

Also Read: Afcons drops loan repayment plan to Shapoorji firm after Sebi questions use of IPO proceeds

The change was made after the company received observations on its draft red herring prospectus from the market regulator and the stock exchanges.

The Rs 25 crore earmarked for the Shapoorji Pallonji Finance loan will now be used to pay State Bank of India loans.

The loan repayment to Shapoorji Pallonji Finance represented a very small portion of the Rs 500 crore the company has earmarked for repayment to its lenders.