What is SEBI’s new IPO fundraising requirements?

SEBI, the capital, and commodities market regulator, revised the rules for initial public offerings on Tuesday, affecting both investors and issuing companies. The regulations governing preferential allotment of shares were also changed by the regulator. We examine some of the new guidelines, as well as the reasons behind SEBI’s decision to implement them.

Let’s have a look at the significant revisions approved by SEBI’s board of directors on December 28th and what they signify for investors and issuers.

What is SEBI's new IPO fundraising requirements?

All the following guidelines will be applied to upcoming IPOs

#1 – Greater clarity about the issue’s goal

Under the new rule, companies soliciting funds for inorganic expansion must clearly state acquisition or investment targets; if they are unable to do so, the amount set aside for acquisitions or investments cannot exceed 25% of the entire amount raised.

Furthermore, inorganic expansion and general company spending cannot account for more than 35% of the total amount raised.

Many companies were taking advantage of the IPO frenzy, according to market observers, and were raising money even without requirements due to the optimistic secondary market and high demand for IPOs. Companies considering an IPO must now be transparent about how the proceeds will be used.

#2 – Increased anchor investor lock-in duration

Anchor investors can sell only 50% of their investments after a 30-day lock-in period; the remaining 50% must wait 90 days.

Many IPO-bound companies allocated shares to anchor investors to ensure more traction for the IPO; the opportunity to exit after a 30-day lock-in period, as well as the IPO bull market, provided a safety net for the anchor investors. After the 30-day lock-in period expired, share prices of newly listed businesses fell sharply. Anchor investors will need to be more cautious in the future because half of their money will be locked for 90 days.

#3 – Separate sub-categories under the NII category

One-third of the NII allocation will be set aside for applications ranging from Rs.2 to Rs.10 lakhs. The rationale behind this is to create a sub-category for investors who aren’t tiny enough to be classified as HNI but aren’t large enough to be classified as such.

With up to 900X oversubscription in the NII category, it was practically difficult for investors in the INR 2-10 lacs category to secure any allotment. The ability of large HNIs to borrow extensively and bid will be reduced because of this decision.

#4 – Offer for Sale Restriction

Under the new SEBI rule, current shareholders who control more than 20% of the pre-issue stock cannot sell more than 50% of their stock, and shareholders who own less than 20% of the pre-issue stock cannot sell more than 10% of their stock.

Many IPO-bound organisations, especially private equity and venture capital funds were not in need of funding for economic reasons, but rather as an exit opportunity for founders and existing shareholders. These IPOs were being offered at extremely high valuations, benefiting early investors at the expense of IPO investors.

#5 – Book-built issue minimum price band

In the future, the upper price band must be at least 105 percent of the lower price band, which means that if the lower price band is Rs.1,000, the upper price band must be at least Rs.2,050. The goal of SEBI in this case is to ensure adequate price discovery. Price discovery regulations were only followed on paper until recently, and most IPOs, even those that listed at a discount, were allotted to the top price band.

Paytm’s pricing range was Rs.2,080-2,150, but shares were granted at Rs.2,150; Paytm was listed at a discount of 27.25 percent at Rs.1,564. Companies will be obliged to price their concerns more realistically with a wider pricing band, ensuring effective price discovery.

#6 – Preferential share issue pricing

The preferential share issuance floor price will be the maximum of the volume weighted average price (VWAP) for the previous 10 and 90 trading days. The primary goal of this amendment is to ensure that firms do not issue cheap shares to preferred investors in exchange for cash, which is typically at the expense of minority shareholders.

#7 – Monitoring and reporting on IPO proceeds

Instead of Scheduled Commercial Banks and Public Financial Institutions, credit rating firms registered with the board will now be allowed to operate as monitoring agencies.

This monitoring will continue until the fund is fully utilised, and the amount raised for general corporate spending will be included in the monitoring agency’s report. This approach aims to prevent IPO cash from being misappropriated.

Conclusion

Market watchers have praised the modifications passed at SEBI’s board meeting on December 28, which are expected to assist retail and minority shareholders.