Sebi clears slew of norms to tighten IPO process


MUMBAI: In peak bull market, while public listings kept the market buzzing with momentum it also exposed gaps in regulations particularly when new age companies made their debuts on stock exchanges. With just days left for the year to end, the Securities and Exchange Board of India (Sebi) on Tuesday cleared rules which will address gaps such as those involving price bands, anchor investor lock-in period, and the quantum of holding a majority shareholder can offload on listing day.

These changes are based on a 16 November discussion paper. The Board has ratified norms aimed at addressing price volatility the stock witnesses either on the day of listing or when anchor investors exit their holding.

Currently, during an offer-for-sale (OFS) shareholders can exit part or their entire holding. But in the case of new age companies, which typically do not have an identifiable promoter and are making consistent losses, a complete exit from prominent shareholders does not inspire confidence in investors.

To do away with this anomaly, the markets regulator has mandated that shareholders, who hold more than 20% stake, cannot exit their entire holding on listing day but only 50% of their holding.

Sebi has also tightened disclosures around the objective of initial public offer (IPO) proceeds. It observed that in IPO draft papers of new age companies, the stated objective for fund raising is ‘funding of inorganic growth initiatives’.

“Raising fund for unidentified acquisition leads to some amount of uncertainty ambiguity in the IPO objects,” the markets regulator had said in the discussion paper issued on 16 November.

Now companies will be able to use only 25% of the IPO proceeds for such growth initiatives. The use of funds raised during IPO will be monitored by rating agencies going forward.

In any public offer, the presence of institutional investors and continued presence of anchor investors gives confidence to the broader market. But when anchor investors exit as soon as the mandatory 30-day lock-in period ends, it brings about volatility in the stock.

Shares of food delivery major Zomato had tanked 8.8% when anchor investors exited their holding after the one-month lock-in. Shares of One97 Communications, Paytm’s parent company, plunged as much as 13% on 15 December due to exit of anchor investors. Even FSN E-Commerce Ventures Ltd., the operator of beauty startup Nykaa, swung between intraday gains of 4.4% and loss of 5.91% after the regulatory lock-in on anchor investors ended.

Sebi will increase the anchor lock-in period to 90 days from 30 days as it believes that the move will stabilise share price and prevent losses for retail investors. This will be applicable for only 50% of allocation to anchor investors.

Taking cues from the failed deal between PNB Housing Finance Ltd and Carlyle Group, Sebi has also tweaked valuation norms when there is a change of control.

In June, PNB Housing had announced that it was going ahead with a preferential issue of equity shares and issuing share warrants to Carlyle Group. This involved 4,000 crore equity fund infusion led by its existing investor Carlyle group, resulting in transfer of control.

The deal very quickly ran into hot waters as a group of investors claimed that these shares need to be valued as the company’s Articles of Association (AoA) stated that any sale would require an independent valuation of shares.

Going forward, listed entities will need to adhere to the AoA as well as Sebi’s norms. Further, if a company allots more than 5% shares to any entity, then a valuation report needs to be furnished.

Sebi has tweaked price band norms as well. Hereon, the difference between the floor price and the upper price shall be at least 105%, with regulator observing that price band offered by companies in recent twas narrow.

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