SEBI proposes stricter IPO norms as startups listings gather pace

Market regulator, SEBI, Securities and Exchange Board of India, has recommended tautening the rules on how the new and loss-making firms can spend cash raised through IPOs, Initial Public Offerings. The apex board will seek public comments on the proposal till the 30th of November, after which the regulations will be set up. 

The change in the governing rules will bring more accountability in the way start-ups listings are gathering pace. This year there has been a record INR 1 trillion mop-up through the Initial Public Offering (IPO), following which SEBI issued a consultation paper in this regard on Tuesday, 16 November 2021.

Let us take a look at the proposals laid out by SEBI:

 

• One of the significant revisions in the IPO norms is that only 35% of the IPO issue can now be used for general corporate purposes and other organic growth actions.
• However, if the firm/ companies can be more explicit about their policies when filing the offer document, this limit would not apply.
• The eligibility norms for making an IPO, for firms that do not have identifiable promoters, the sale of shares by significant shareholders will now be limited at 50% of the pre-issue holding. Bear in mind that a “significant” shareholder is the investor who holds over 20% of the pre-issue holding
• For such shareholders, there would be a six month lock-in period post the share sale.
• Another proposal is that a minimum of 50% of the shares that are assigned in the anchor category should stay locked for 90 days. Presently the lock-in period is of 30 days only. As per SEBI norms for IPO, this would give more assurance to other investing parties as well.
• SEBI has recommended that the issue returns, allocated under the ‘general corporate purpose (GCP)’, should be scrutinised. Each company that raises IPO must appoint a supervising agency to ensure that the funds are utilised as per the proposition in the offer document.
• Sebi has observed that companies are coming up with very large issues, thus making the GCP amount substantial.

In conclusion
Companies would now need to be extra specific about how they utilise the IPO money. The existing shareholders would also have to be available in the market game. All in all, IPO proceeds will now have to endure greater censoring.