Sebi forces key changes to Justdial IPO

Scaled-down valuations force company to sell 25%, instead of 10%

The issue size for the coming initial public offering (IPO) of search engine company Justdial could have been just 10 per cent of the paid-up share capital instead of 25 per cent, but for a nudge by the Securities and Exchange Board of India (Sebi). This, along with several other recommendations by the market watchdog, led to the dimensions of the offering being different from what its promoters had envisaged.

When Justdial filed its offer document last year, it intended to sell shares amounting to just 10 per cent of the fully diluted paid-up equity share capital — it was looking for valuations of more than Rs 4,000 crore. According to rule 19 (2) (b) of the Sebi ICDR (Issue of Capital and Disclosure Requirements) Regulations, during an IPO, a company has to allot at least 25 per cent of its shares to the public.

However, there is an exemption. If the post-issue capital of the company, at the issue price, is more than Rs 4,000 crore, the company is allowed to go public with 10 per cent public shareholding. Subsequently, it is given three years to comply with the 25 per cent public shareholding requirement.

According to a source, Sebi wasn’t convinced with the valuation Justdial had sought, a valuation that would have given the company market capitalisation of more than Rs 4,000 crore. To convince Sebi, the bankers had to lower the valuation, which forced it to sell 25 per cent, instead of just 10 per cent, as envisaged earlier.

Though it is beyond Sebi’s mandate to decide IPO pricing, the regulator wanted to ensure the pricing was fair, the source said, adding the company’s promoters were asked to provide a ‘safety net’ feature for retail investors. While it was included in the red herring prospectus, the draft offer document filed by Justdial had no safety net feature.

“As the company is from a new sector, Sebi asked us to provide a safety net to safeguard the interest of retail investors,” said an investment banker handling the issue. Under the voluntary ‘safety net’ option, a company has to refund investors if the market price falls below the issue price 60 days after listing.

Citibank and Morgan Stanley are the lead managers handling the Justdial offering. The company has priced the IPO in a price band of Rs 470 and Rs 543 a share. At the upper end of the price band, Justdial would raise Rs 950 crore by selling about 17.5 million shares to the public. The entire offering would be secondary, with promoter V S S Mani and existing investors, including SAIF Partners, Tiger Global, Sequoia Capital and SAP Ventures, selling part of their holdings.

V S S Mani, founder and chief executive, Justdial, said, “We intended to sell just 10 per cent in the IPO, but according to a Sebi rule, the promoter has to sell about 25 per cent.”

As Justdial’s profitability track record isn’t on the lines of that laid down by Sebi, its IPO had to be institutional investor-backed. Private equity-backed Justdial has 75 per cent reservations for qualified institutional buyers (QIBs), 15 per cent for nigh net worth individuals (HNIs) and just 10 per cent for retail investors. Usually, half the IPO is reserved for QIBs, 15 per cent for HNIs and 35 per cent for retail investors.

According to rule 26 (1) (b) of ICDR, a company should have average pre-tax operating profit of at least Rs 15 crore (calculated on a restated and consolidated basis) during the three most profitable years in the five consecutive preceding years.

WHEN SEBI JUST DIALED

• Justdial intended to sell 10% in IPO
• Was seeking valuations of about Rs 4,000 cr
• Sebi questioned the bankers on valuations
• Rule forces Justdial to sell 25% instead of 10%
• Sebi also asks promoters to provide ‘safety net’ option
• IPO is 75% QIB-backed based on profitability criteria