Sebi extends a helping hand for PE-backed IPOs

Move to allow shares held by funds as lock-in to help start-ups with low promoter holdings

It’s one hurdle less for private equity (PE) players looking for exits from companies where the promoter holding is very less or there is no identifiable promoter.

The Securities and Exchange Board of India (Sebi) has said PE funds can pitch in to fill the shortfall in promoters’ lock-in during initial public offerings (IPO). According to Sebi rules, promoters have to lock in a minimum of 20 per cent of the post-issue capital for three years. This measure was introduced in the mid-1990s, after several investors burnt their hands by investing in companies floated by fly-by-night operators, to ensure that the promoters had enough incentive to stay with the company after listing.

But this proved to be a stumbling block for many technocrat-promoted, PE-backed start-ups, where the promoter holding fell short of 20 per cent. Now, Sebi has decided to allow registered PE and venture funds to contribute up to 10 per cent to this lock-in.

KEY TO IPO LOCKS

• Promoters to lock in minimum 20 per cent of post-issue capital
• Shares cannot be sold for three years from IPO
• Sebi-registered funds allowed to share this burden
• Funds can lock-in up to 10 per cent
• Move to facilitate companies with low promoter holding

“To encourage professionals and technically qualified entrepreneurs who are unable to meet the requisite 20 per cent contribution by themselves, promoters will be allowed to meet the same with the contribution of Sebi registered alternative investment funds such as SME funds, infrastructure funds, PE funds, VCFs (venture capital funds), etc, subject to a cap of 10 per cent,” Sebi said in its press release.

Prithvi Haldea, chairman and managing director, Prime Database, said: “There was an increasing realisation that a number of technology companies are started with external funding on day one. There is further dilution through stage-I, stage-II funding, leaving promoters short of the lock-in obligations.”

According to him, the move to allow funds to contribute to this lock-in was sought by the industry for long. “The PEs and VCs typically have a horizon of three to five years. They should not have a problem with the lock-in,” Haldea added.

In the past, Sebi had made a few special exemptions on a case-by-case basis. In 2010, a clutch of private equity and venture capital funds had taken the mantle of promoters in SKS Microfinance. Vikram Akula, the entrepreneur who promoted the firm, had only six per cent stake in the company. Since this fell short of the regulatory requirements, four entities — Sequoia Capital, Sandstone Capital, Kismet Capital and SKS Trust — took the mantle of promoters.

Experts said such commitment from funds would be a confidence booster for retail investors who participate in IPOs. PE funds, which are committed to taking the companies to IPOs, will be happy doing it, said Deepesh Garg of Ozone Capital. “This will be a facilitating step, but it’s not going to fire up the IPO market,” Garg added.

Harish Vasudevan of SVS Securities said the move must be seen in the larger context. “It is one of the several steps taken by the regulator to stimulate the IPO market. IPOs will be key to the revival of the broader market. The market wouldn’t mind good PE-backed IPOs. And, PEs, being long-term investors, wouldn’t mind the lock-in,” he said.