What do SEBI’s new norms on preferential allotment and price bands say? Who benefits from the changes?
the story So FarSecurities and Exchange Board of India (SEBI) on Tuesday issued some new rules for initial public offering (IPO).
The new rules will oversee how companies price their shares, how they use the money they receive from investors, how many shares of the company promoters can sell during an IPO, and how quickly anchor investors can buy their first shares. IPO can sell the raised stake.
What is this?
As per the new SEBI norms, the price band of the IPO should be set in such a way that the ceiling price is at least 105% of the floor price.
Secondly, companies will not be allowed to use more than 35% of the funds collected through the IPO to purchase other businesses, unless they provide sufficient details.
Third, promoters holding more than 20% stake in a company cannot sell more than half their stake in an IPO.
And finally, anchor investors will not be able to sell more than half of their shares before 90 days from the date of the IPO as against the current time frame of 30 days.
Why has SEBI come up with these new rules?
Stock markets around the world have seen a boom in IPO offerings with a record amount of capital raised by companies. In India alone, more than ₹1 trillion of capital has been raised through IPOs this year. It is natural for both the number and size of IPOs to increase during a bull market. Companies view bull markets, in which a lot of investors’ money is usually chasing stocks and overvalued them as an opportunity to collect the funds needed for their growth. Many corporate owners may also see the IPO boom as an opportunity to sell their stake in the business at an attractive price.
Notably, many companies that raised funds through IPO this year, such as Zomato, Paytm etc., are making losses. This places investors who have invested in these IPOs at risk of huge losses if there is a sharp correction in the prices of these shares. For example, Paytm has lost more than a third of its value since it was listed for trading. SEBI is of the view that the new rules will ensure that promoters of companies will have a greater role in the game. Its price band rule, on the other hand, appears to be aimed at tackling the tendency among companies to set up a narrow price band for their issues. SEBI is of the view that a narrow price band hinders the price discovery process.
Will the new rules help?
SEBI’s new rules have been widely welcomed to try to protect retail investors from risk in the fast-growing IPO market. However, some fear that the new rules may hinder companies from raising fresh capital to fuel growth.
For example, requiring companies to be specific about how they will use the money collected through an IPO can affect flexibility as business conditions can change rapidly in the real world. Also, restrictions on anchor investors may affect the liquidity in the market as many large investors may not be willing to hold their investments in 90 days and thus decide to abstain from participating in IPOs altogether.
Some critics also raise the question whether SEBI should try to hand over investors while making investment decisions. They believe that the investors who suffer the most loss or gain from their investment decisions are best equipped to take the necessary precautions before investing in an IPO. The same applies to the way companies fix IPO prices. Companies typically avoid under-pricing or over-pricing their issues because this will affect how much capital they can raise. In fact, setting a narrow price band can be a way to avoid valuation uncertainties that can affect fundraising.
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