SEBI to Stiffen Rules for the Use of IPO Proceeds

The markets regulator on 28/12/2021 (Tuesday), tightened rules for initial public offerings. SEBI has aimed at tackling regulatory gaps and extreme stock price volatility on their trading debut. In the year 2021 Indian companies have raised Rs. 1.19 trillion through IPOs with 63 companies going public.

However, the raging bulls have highlighted a few loopholes in the listing process, especially for new companies.

SEBI has said that where the objective is inorganic growth, both acquisition and investment target remain unidentified, the issuer can use only 35% of the total proceeds for such objects.

SEBI Chairperson Ajay Tyagi asserted that the regulator has no intention to control the prices of IPOs in any manner.

"Price discovery is a function of the market and that is how it works globally as well," he said at a media briefing after the board meeting.

What are the new norms?

• Firms can use only 35% of the total IPO proceeds for unidentified inorganic growth. These limits will not apply, if the proposed acquisition or strategic investment object has been identified and suitable specific disclosures are made at the time of filing of the offer document.
• Credit Rating Agencies (CRAs) registered with SEBI will be permitted to act as Monitoring Agency instead of Scheduled Commercial Banks and Public Financial Institutions.
• Anchor investors can sell only 50% of their shares at the end of one month and the remaining at the end of 90 days.
• IPO’s upper price band should be at least 5% more than the floor price.
• Those holding over 20% of the pre-issue shareholding of the issuer company cannot offer more than 50% of their holding in an offer for sale.
• Selling shareholders (individually or acting in concert) cannot offer more than 10% of their pre-issue shareholding in the OFS if they hold less than 20% of the pre-issue shareholding.

“This proposal should not be viewed negatively, as it gives more stability post issue and could help in rationalizing the IPO pricing," said Darshan Upadhyay, Managing Partner, Stratage Law Partners.