On 28 December 2021, the Securities and Exchange Board of India (“SEBI”) has decided to tighten norms for raising funds through Initial Public Offering (“IPO”) and preferential issue. It has decided to inter alia restrict use of funds raised through IPO for unidentified acquisitions, revise cap on pre-issue shareholdings which can be offered for sale in IPO by issuer without track record, increase lock-in for anchor investors, relax lock-in requirements and pricing methodology for preferential issue amongst other changes.
According to the decisions, several regulations will be amended to address the regulatory gaps which have emerged recently while witnessing several public issues in the manner described below:
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:
- Conditions for objects of Issue: The companies, having set out objects for future inorganic growth without identifying any acquisition or investment target in the offer document, have been barred from spending on such unidentified acquisitions and general corporate purpose exceeding 35% of IPO proceeds, while the amount earmarked for such unidentified acquisition or investment target cannot exceed 25% of IPO proceeds. These limits do not apply if the proposed acquisition or strategic investment object has been identified and specific disclosures about the same have been made in the offer document.
- Conditions for Offer for Sale (OFS) to public in an IPO where DRHP is filed by issuer without track record: The large shareholders holding more than 20% of pre-issue shareholding of the company have been restricted from offering for sale more than 50% of their pre-issue shareholding on the listing day. Further, the shareholders holding less than 20% of pre-issue shareholding have been restricted from offering for sale more than 10% of their pre-issue shareholding on the listing day.
- Monitoring Agency and reporting on utilization of issue proceeds: Credit rating agencies will be permitted to act as monitoring agency instead of Scheduled Commercial Banks and Public Financial Institutions for monitoring utilization of issue proceeds, which monitoring will continue till the issue proceeds are fully utilized instead of 95% at present. The amount raised for GCP shall also be brought under monitoring which shall be required to be disclosed in the monitoring report, to be placed before audit committee on quarterly basis instead of annual basis.
- Price Band: SEBI has decided to set a minimum price band of 5% for the book built issue, which issue uses the process of price discovery involving generating and recording investor demand for shares before arriving at an issue price. This implies that the difference between floor price and upper price band should at least be 5%.
- Lock-in for Anchor Investors: The lock-in period for anchor investors has been increased from 30 days to 90 days effecting from April 2022 which will be applicable to only 50% of their allocation while balance 50% will remain under lock-in for 30 days. The anchor investors are the institutional investors who are invited to buy shares of a company before its IPO rollout to improve popularity of the issue. This change is aimed at benefitting and giving confidence to other investors.
- Revised allocation methodology for Non Institutional Investors: The retail investor quota has been bifurcated by mandating that 1/3rd and 2/3rd of the retail investor quota will be reserved for investors with application size of (i) Rs. 2-10 lakhs and (ii) more than Rs. 10 lakhs respectively.
- Pricing Methodology: At present, the price of the shares to be allotted pursuant to preferential issue is required to be not less than higher of the average of weekly high and low of the Volume Weighted Average Price (VWAP) of shares on stock exchange during 26 weeks or VWAP during 2 weeks preceding the relevant date. These periods have been reduced to 60 days and 10 days respectively while considering that existing norm of 26 weeks is a very long period for determining price in view of market volatility.
- Mandatory requirement of valuation report: Now, it will be mandatory to furnish valuation report from registered independent valuer in case of change in control/allotment of more than 5% of post issue diluted share capital. Further, change in control may be done only pursuant to reasoned recommendation from committee of independent directors.
- Lock-in provisions for preferential issue: At present, the shares allotted pursuant to preferential issue are subject to lock-in period so that the said shares cannot be offloaded immediately after the issue to benefit from price arbitrage. SEBI has decided to reduce lock-in period from 3 years to 18 months (in case of promoters) and from 1 year to 6 months (in case of non-promoters) to harmonize the same with lock-in requirements in case of public issue which were recently reduced.
- Pledging of shares: It has been decided to allow pledging of shares allotted to promoters/promoters group under preferential issue during lock-in period for the purposes of fulfilling condition of loan sanctioned for financing the objects of the preferential issue.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
The appointment or reappointment of any person, including as whole-time director or managing director or manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with prior approval of shareholders. Further, it has been decided to amend the regulations for issuance of securities in dematerialized form in case investor requests for issue of duplicate shares, etc. This move will improve ease, convenience and safety of transactions for investors.
SEBI (Alternative Investment Funds) Regulations, 2012:
It has been decided to introduce the Special Situation Funds (SSF) which shall invest only in the stressed assets such as stressed loans available for acquisition, security receipts issued by asset reconstruction companies, securities of companies in distress, etc. The SSF shall have features like minimum corpus of Rs. 100 Crores, minimum investment of Rs. 10 Crores by an investor/Rs. 5 Crores by an accredited investor, initial and continuous disclosure requirements mandated by RBI for ARC’s investors, etc.
SEBI (Mutual Funds) Regulations, 1996:
It has been decided to mandate Trustees to obtain consent from unit holders through voting process if majority of them decide to wind up any scheme or prematurely redeem units of any closed ended scheme. The voting results will be required to be published within 45 days of the publication of notice of circumstances leading to winding up.
SEBI (Foreign Portfolio Investors) Regulations, 2019:
It has been decided to amend the regulations to enable SEBI to generate unique registration numbers of FPIs on receiving basic details of the applicants seeking FPI registration from either of SEBI registered depositories.
Alpha Rajan & Partners Comment:
Although these amendments have been decided to be made in the SEBI regulations for the benefit of the investors and improve disclosure and monitoring norms, however, these changes may pose certain challenges and impact plans of issuers intending to raise funds through IPO or preferential issue.