The market regulator Sebi has recalled its earlier directive asking investment bankers to ensure that special rights given to shareholders of IPO bound companies are lapsed when the updated draft red herring prospectus (UDRHP) is filed.
In the latest communication sent to the Association of Investment Bankers of India (AIBI) on June 24, which Moneycontrol has reviewed, the regulator has said that the special rights need to be lapsed only at the time of listing.
This should come as a relief to PE investors.
This is because the earlier directive had left PE investors in a precarious position, of holding stake in a company without a say in the running of it and without any surety of exit through listing.
Therefore, after industry consultations, the market regulator has revised its directive.
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In a letter sent to the Association of Investment Bankers of India (AIBI), the market regulator has said that all special rights granted to shareholders shall only lapse at the listing of companies.
The letter said, "This has reference to the advisory dated May 29, 2024 issued to AIBI and the Merchant Bankers."
"In this regard, based on the feedback received from the Industry and the market participants, para -13 of the said advisory shall be read as under :
“13. All special rights granted to shareholders under AoA, SHA or through any arrangement or agreement shall lapse on the date of listing.” AoA is Articles of Association and SHA is Shareholders' Agreement.
In the earlier directive, the regulator had asked investment bankers to ensure that the special rights lapse at the filing of the updated draft red herring prospectus (UDRHP). The UDRHP may be filed months before the actual listing.
"Looks like SEBI has heard the market on this one and gone back to the earlier position of dropping special rights at listing, as opposed to filing the updated draft red herring prospectus. Investors will breathe a sigh of relief for sure," said Manshoor Nazki, partner at IndusLaw.
How a listing unfolds
Usually, a company that is looking to list files a draft red herring prospectus (DRHP). Then, SEBI seeks clarifications (if any) from the lead manager regarding the DRHP following which the UDRHP is filed and the market regulator gives the go-ahead for the issue of shares. This approval is valid for 12 months, that is, the company can choose to list at any time within the year following the endorsement.
As Nazki had said in an earlier interaction, "If the market is not favourable, then they may not list at all. Then the PE investor is left holding shares in the company without the rights to protect their investment in the company, unless those rights are reinstated."
But this has now been fixed with the new directive, since the investors need to give up these rights only at the time of listing.
IPO pricing concerns
Market sources had told Moneycontrol that the regulator's earlier directive may have been aimed at reducing PE funds' influence over IPO pricing. Crucial decisions including pricing of the issue, choosing of anchor investors and allocation to anchor investors, are done in this "sensitive period" between the UDRHP being filed and the listing of the shares.
According to market sources, the regulator has been concerned about PE investors' influence over the IPO process after a few newage tech companies saw their pre-IPO investors exit at exorbitant profits while the public investors were left to deal with a dramatic fall in prices. Therefore, the regulator has been asking for the investors to be kept out of the IPO decisions through various steps, according to insiders.
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