Sebi proposes stricter IPO norms as startups listings gather pace

The Securities and Exchange Board of India (Sebi) has proposed to tweak rules governing initial public offerings (IPOs) to bring in more transparency and accountability.

The market regulator has sought a cap on the amount companies, mainly start-ups, can raise for inorganic growth initiatives and also on the quantum existing shareholders can offload in the IPO. Further, Sebi has proposed to increase the lock-in period for anchor investors from 30 days to 90 days. It has also called for the monitoring of IPO proceeds.

The proposals come amid a record Rs 1-trillion-plus mop-up through IPOs this year, the bulk of which came from new-age and loss-making companies. The regulator on Tuesday issued a consultation paper in this regard. Sebi has invited market feedback before the end of this month, after which it will firm up the rules.

“It is seen that lately in some of the draft offer documents, issuer companies are proposing to raise fresh funds for objects where object is termed as 'Funding of Inorganic Growth Initiatives', which include future acquisitions, investing in new business initiatives and strategic partnerships by the company without identifying the target acquisition or specific investments proposed to be deployed out of issue proceeds… raising fund for unidentified acquisition leads to some amount of uncertainty in the IPO objects,” Sebi said in the paper.

Start-up IPOs such as Zomato, Policy Bazaar, and Paytm had stated objects of the issue as funding acquisitions and growth initiatives.

“Sebi wants to limit the end use of funds raised if the objective of IPO proceeds is not specific. It wants to encourage definitive end-use plans from companies going for IPOs. This will help in better monitoring and help safeguard investors,” said Supreme Waskar, a corporate lawyer.

The current rules allow companies to raise up to 25 per cent of their IPO proceeds under a vague head of ‘general corporate purpose (GCP)’.  

Sebi has prescribed a combined limit of 35 per cent of the fresh issue size for deployment on such objects of inorganic growth initiatives and GCP. The cap won't apply if the companies are more specific about their plans at the time of filing their offer document.

"The restriction (combined or otherwise) on usage of funds for funding of inorganic growth initiatives may cause a lot of discomfort to companies intending to go for an IPO, as this would, ostensibly, come across as a restriction on the flexibility available with companies to deploy their funds," said Gaurav Mistry, associate partner, DSK Legal.

ASSESSING IMPACT

• Companies will have to be more specific about what they want to do with IPO money
• Existing shareholders will have to show more skin in the game
• Anchor investors will have to show longer commitment
• IPO proceeds will undergo greater monitoring

The regulator has also raised concerns over high dilution by existing shareholders in the IPO. It has proposed companies where there are no identifiable promoters, those holding over 20 per cent can sell at most half of their pre-IPO holdings. The remaining will remain locked in for at least six months from the IPO.

The move, Sebi said, is to ensure more skin in the game and inspire confidence among investors, particularly in the case of loss-making companies.

"IPOs have historically been one of the most sought after routes for exit by investors, especially financial investors. A blanket restriction on the pliability of significant shareholders to exit through an offer for sale (without taking into consideration the nature of investment, the investment tenure, and many such essential parameters) could come across as extremely unpalatable, and may have a cascading effect on the Indian capital markets going forward," said Mistry.

Sebi has also proposed that at least 50 per cent of the shares allotted in the anchor category remain locked for 90 days instead of the current lock-in of just 30 days. “It is felt that a longer lock-in for anchor investors will provide more confidence to other investors,” Sebi said.

The regulator has also proposed that the issue proceeds earmarked under GCP be brought under monitoring. Every company raising fresh proceeds in the IPO has to appoint a monitoring agency. The agency’s job is to oversee whether the funds are used for the stated purpose in the offer document. The GCP component is currently kept out of such monitoring.