In the year 2021 several big Indian companies such as Paytm, Zomato, Policybazaar have raised funds through initial public offerings (“IPOs“) in the Indian stock markets. The year 2022 also has some big IPOs lined up like Life Insurance Corporation of India, Think and Learn Private Limited (Byju’s), Mobikwik Credit Private Limited, etc.
Considering the buoyant market for IPOs and in order to ensure the protection of investors, the Securities and Exchange Board of India (“SEBI”), through a press release dated December 28, 2021, approved amendments to the regulatory framework under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) and consequential amendment to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (“Regulations“). In this background, it is important to understand how the amendments to the Regulations (“Amendments“) will impact companies and investors.
Some of the key Amendments pertaining to IPOs approved by the SEBI are as follows:
1. The following shall be applicable for Draft Red Herring Prospectus (“DRHP”) filed on or after notification in the Official Gazette:
(a) Conditions for objects of the issue:
(i) If the issuer company in its offer document sets out an object for future inorganic growth but has not identified any acquisition or investment target, the amount for this and the amount for a general corporate purpose (“GCP”) cannot exceed 35% of the total amount being raised through IPO.
(ii) The amount earmarked for such objects where the issuer company has not identified the acquisition target in the draft offer document and the offer letter, the amount cannot exceed 25% of the total amount being raised by the issuer.
(iii) Such limits shall not be applicable if the proposed acquisition/strategic investment object has been identified and suitable specific disclosures about such acquisitions or investments are made in the draft offer document and the offer document at the time of filing of offer documents
(b) Conditions for an Offer for Sale (“OFS“) to public in an IPO where DRHP is filed by the issuer without track record i.e., under Regulation 6(2) of ICDR Regulations, 2018:
(i) Shares offered for sale by selling shareholders, individually or with persons acting in concert, holding more than 20% of the pre-issue shareholding of the issuer company, shall not exceed more than 50% of their pre-issue shareholding.
(ii) Shares offered for sale by selling shareholders, individually or with persons acting in concert, holding less than 20% of the pre-issue shareholding of the issuer company, shall not exceed more than 10% of the pre-issue shareholding of the issuer.
Analysis:
Prior to the Amendments, companies aiming for IPOs did not have to specify how much of the raised funds would be earmarked for acquisitions, and/or for routine investments. The amendment imposes an obligation on the company aiming for IPO to specify how much of the raised funds would be utilized for acquisitions, and/or for routine investments. In addition, the Amendments put a cap on the future acquisition of unspecified targets and amounts for GCP. This may make companies a bit more judicious towards the specific requirement of how much money they want to raise and why.
Previously, there were no restrictions on the sale of shares by existing shareholders of the company going for IPO. But with the Amendments, existing shareholders owning more than 20% of the pre-issue cannot offer more than 50% of their shares in an IPO. Whereas those holding less than 20% of pre-issue cannot sell more than 10% of their shares. This will impact the exit mechanisms of PE, VC, and other investors as the scope of their exit will be limited. It, therefore, requires consideration whether such an amendment is necessary as most IPOs are propelled by the desire of such investors to obtain an exit from the issuer company.
2. Monitoring Agency and reporting of issue proceeds
(i) Credit Rating Agency (CRA) registered with the Board, shall be permitted to act as Monitoring Agency instead of Scheduled Commercial Banks (SCBs) and Public Financial Institutions (PFIs).
(ii) Such monitoring shall continue till 100% instead of 95% utilization of issue proceeds as present.
(iii) Amount raised for GCP shall also be brought under monitoring and utilization of same shall be disclosed in the monitoring agency report.
(iv) Monitoring agency report shall be placed before audit committee for consideration “on a quarterly basis” instead of “on an annual basis.”
Analysis:
Prior to the Amendments, rating agencies did not monitor the funds raised through IPOs. With the Amendments, rating agencies can monitor the usage of IPO proceeds till 100% of it is utilized. This amendment is likely to prevent companies from misusing IPO funds. However, it remains to be seen how this rule will be enforced, with some market watchers of the view that the rule will have limited impact and will just add to the layers of compliance.
3. Price Band
In case of book-built issues, a minimum price band of being at least 105% of the floor price shall be applicable for all issues opening on or after notification in the official gazette.
Analysis:
Earlier, companies going for IPO were free to set a price band as they wished. This amendment proposes that the upper price band must be at least 105% of the lower price band. The amendment is expected to ensure that companies price their IPO more realistically and aptly thus enabling protection for retail investors.
4. Lock-in for Anchor Investors
The existing lock-in of 30 days shall continue for 50% of the portion allocated to the anchor investor and for the remaining portion, a lock-in of 90 days from the date of allotment shall be applicable for all issues opening on or after April 01, 2022.
Analysis:
The change in the lock-in period from 30 days to 90 days will impact non-genuine anchor investors, as they will have to think before investing just for the sake of endorsing the issue and exiting their investment after 30 days lock-in period ends.
5. Lock-in provisions for preferential issue
The tenure of lock-in of shares pursuant to a preferential issue shall be reduced as follows:
(i) For Promoters:
The lock-in requirement for allotment of upto 20% of the post issue paid-up capital shall be reduced to 18 months from the existing 3 years. The lock-in requirement for allotment exceeding 20% of the post issue paid-up capital shall be reduced to 6 months from the existing 1 year.
(ii) For Non-promoters
The lock-in requirement for allotments shall be reduced from a requirement of 1 year to 6 months
Analysis:
This amendment is a welcome step as it will enable promoters and non-promoters to sell their shares in the issuer company within a lesser period thus ensuring a quicker exit.
Conclusion: The Amendments reflect SEBI’s intention to protect retail and other investors and are indeed a welcome step forward in the development of the IPO markets in India. Issuer companies however will have to be vigilant and careful to ensure compliance with these Amendments.
The Securities and Exchange Board of India (“SEBI”) recently approved amendments to the regulatory framework governing initial public offerings (“IPOs”) preferential allotments of listed companies. In this article, authors Mini Raman and Angelina Talukdar discuss these recent amendments and analyze how they will potentially impact issuer companies and various types of investors. These amendments by the SEBI are particularly relevant in light of the increased interest in going public by various successful start-up companies whose shareholders comprise of venture capital investors.