Here’s the full summary of SEBI’s recent Consultation paper on IPO Rules in simple words:
On 16th of November, 2021, SEBI released a consultation paper regarding the recommendations to review certain aspects of Public issue framework under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
Let us study in simple terms what are the existing rules and what changes SEBI is proposing :
Firstly, A company can come up with IPO for 2 broad objectives. They are :
1.For a fresh issue i.e. to raise fresh capital for the objects defined in the offer document, or
2. For an offer for sale (OFS) to public i.e. sale of equity by existing shareholders.
Let us study each one in detail :
1.For a fresh issue i.e. to raise fresh capital for the objects defined in the offer
Document
Requirement : Company is required to state the objects of the issue in the offer document.
What’s happening? : It is seen that lately in some of the draft offer documents, companies are proposing to raise fresh funds for objects where object is termed as ‘Funding of Inorganic Growth Initiatives’
Mostly, such issuer companies are new age technology companies (NATCs). The rationale for such objects by NATCs is that NATCs are mostly asset-light organizations which may not require funds traditionally required by the companies for objects such as investment for fixed assets / capital expenditure (capex) etc. The growth in such businesses comes from expanding into new micro-markets and adding or acquiring new customers, companies, technology etc. Accordingly, for primary issuance i.e. for funds raised through fresh issues, such new age technology companies disclose objects in their offer documents under such heads as ‘Funding of Inorganic Growth Initiatives’, so as to cater to their needs.
What’s the Issue? : Raising fund for unidentified acquisition leads to some amount of uncertainty /
ambiguity in the IPO objects. These uncertainties about the objects of the issue increase further in case a major portion of the fresh issue portion is earmarked for such unidentified acquisition even after having the flexibility to earmark up to 25% of the fresh issue size under GCP (general corporate purpose)
Current Rule : Companies already have flexibility to earmark up to 25% of the fresh issue size under GCP (general corporate purpose), under the extant regulations.
Proposed Rule : it is proposed to prescribe a combined limit of up to 35% of the fresh issue size for deployment on such objects of inorganic growth initiatives and GCP, where the intended acquisition / strategic investment is unidentified in the objects of the offer.
However such limits shall not apply if the proposed acquisition / strategic investment object has been identified and suitable specific disclosures about such acquisitions / investments are made at the time of filing of offer document.
For an offer for sale (OFS) to public i.e. sale of equity by existing shareholders
Requirement : Companies with promoters are required to maintain Minimum Promoter
Contribution (MPC), up to at least 20% of post issue capital as MPC which is locked – in
for 18 months post listing.
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to ensure a skin in the game for the promoters to inspire confidence while approaching the public shareholder to raise fresh capital.
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selling shareholders can offer equity shares which have been held by them for a period of at least one year prior to the filing of the draft offer document. Such selling shareholders (who are not promoters) can divest a part or even their entire investment in the OFS.
Current Rule : in case of IPOs where there is no identifiable promoter, there is no
requirement of MPC and lock-in post listing, as there is no promoter.
Proposed Rule : It is proposed that IPOs of companies where there are no identifiable promoters,divestment of stake by significant shareholders (shareholders holding >20%) be capped at say 50% of their pre-issue holding.
Further, for such significant shareholders who are selling through OFS in IPO, their remaining post issue shareholding can be locked-in for a period of 6 months from the date of allotment in IPO
Lock-in for Anchor Investors
Why Anchor Investors? : The concept of anchor investors was introduced to inspire confidence in the issue especially when such investors commit moneys upfront and thus provide an indication of price as well as improve the price discovery during IPO. Other investors may take cue based on the investment decisions of anchor investors.
Issuer Company can allocate 60% of the QIB portion to anchor investors on discretionary basis, out of which 1/3rd is reserved for mutual funds.
Current Rule : The allotment to anchor investors is done one day prior to issue opening date and the shares are locked-in for a period of 30 days from the date of allotment
Proposed Rule : Instead of increasing lock-in period for all Anchor Investors from 30 days, not less than 50% of the Anchor Book shall be given to those Anchor Investors who may be agreeable with 90 days or longer lock-in.
Monitoring of General Corporate Purpose (GCP) amount
What’s GCP? : These are identified purposes for which no specific amount is allocated in the draft offer document. It basically covers general expenditure that companies undertake for running their businesses.
Current Rules : the amount for GCP, shall not exceed 25% of the amount being raised by the company.
Companies are not required to disclose any specific object regarding deployment of GCP amount and also usage of GCP amount is not covered in the monitoring agency report.
Rationale for change : companies are coming up with issues which are very large in size.
Thus, with larger issue size, GCP amount also becomes very substantial in terms of absolute numbers. For e.g. in a Rs. 10,000 crore fresh issue, Issuer Company can have Rs. 2,500 crore earmarked under GCP.
Proposed Change : the issue proceeds earmarked under GCP may also be brought under monitoring. The utilization of GCP amount by the issuer company may need to be disclosed in the quarterly Monitoring Agency report.
How will these steps help retail investors?
These are steps in the right direction as the utilization of the IPO proceeds will now be monitored as Companies will now have to disclose details about the funds utilised in the quarterly monitoring agency report.
It will help the investors to assess where the funds are being invested and what are the prospects of such investments.