June 10, 2023

Sebi Cracks The Whip On IPOs

By Ashwini Agarwal
First publised on 2021-12-29 07:26:44

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The Securities & Exchange Board of India (Sebi) has, belatedly, come out with some excellent rules to ensure that companies going for IPOs do not use the proceeds any which way they want and existing shareholders do not take advantage of the high listing price and exit the company totally once it is listed. In short, the rules prescribed by Sebi are:

1.       Companies can use only 25% of the IPO funds for unidentified mergers and acquisitions

2.       Existing shareholders who have more than 20% stake in a company and are using offer for sale (OFS) as part of the IPO can only offload 50% of their shares through this route

3.       End-use of the IPO proceeds will now have to be monitored by a credit rating agency

4.       Difference between floor and upper price needs to be a minimum of 105%

5.       The non-institutional portion has been divided into two: one-third will be reserved for investors in the Rs 2lakh-Rs 10lakh band and the rest for those investing more than Rs 10 lakh

6.       Anchor investors will now have to hold half their holding for 90 days instead of 30 days now

While Sebi chairman Ajay Tyagi asserted that there was no attempt to control the pricing of IPOs by companies which "is a function of the market" it is clear that Sebi thinks IPO funds are not being used strictly for the purposes disclosed in the prospectus and existing shareholders are taking advantage of the high IPO pricing to exit the company at super profits while the general investor suffers.

These new rules will put a leash on the companies and existing shareholders and they will not be able to take advantage of the IPO like they are doing now. Disclosing norms are still lax in India and Sebi must look into the matter and tighten them further to ensure that the small investor is not taken for a ride.