SEBI’s new IPO and preferential issue rules: Braking?

The continuous wave of Initial Public Offerings (IPOs) has kept our market regulator, the Securities and Exchange Board of India (SEBI), very busy. SEBI has always been proactive for the growth and development of public markets, with the protection of investors (especially retail investors) at the forefront of its proposed rule changes. In its board meeting held on 28 December 2021, SEBI ensured that the year ended with a bang with regulatory changes and preferential issues for IPOs.

In order to fuel the growing need for companies, including new-age tech firms, to have sufficient funds to consider acquisitions and consolidation of businesses that can be strategic, SEBI has mandated companies to utilize a maximum of 35% of their equity-issued proceeds. given a discount. (with a limit of 25% for undisclosed acquisitions) from an IPO. Previously, there were no regulatory limits of the nature proposed last week, though there were regulatory checks and the regulator exercised some degree of flexibility.

Limits have been prescribed on the proportion of shares that can be offered for sale by an existing shareholder based on the holder’s pre-IPO shareholding in the issuer, which is applicable to companies that SEBI tracks for net worth/profitability. Records do not meet the criteria. And they do not even have the identity of the promoters (as mentioned in the SEBI consultation paper on the matter). While the offer is intended to inspire confidence in investors by requiring significant investors to maintain their “skin in the game” once a company is listed on par with identified promoters, investors are required to participate in the offering. Such restrictions on capacity – selling may result in pre-IPO investors looking for alternative forms of exit before listing – even more so in cases where investors have limited fund life – and reduce the size of the issue. can. For example, under the new limits, shares offered for sale to shareholders (individually or with persons acting in concert) who hold less than 20% of a firm’s pre-IPO share capital will be eligible for its pre-IPO share capital. The IPO shall not exceed 10% of the share capital. This could mean that a person with 10 shares would potentially only be able to sell one share in the public offering. We are of the view that it may need to be revisited before being notified in the Official Gazette.

SEBI has now permitted credit rating agencies registered with it to be appointed as monitoring agencies. In addition, SEBI now requires that 100% of the proceeds of an issue be monitored and the frequency of review by the audit committee be increased. In addition, the issue proceeds proposed to be used for general corporate purposes will also have to be monitored, which was not required earlier.

For book-built issues, SEBI has ensured that the minimum gap in the offer price band is such that the cap price is at least 105% of the floor price. This, again, is an interesting intervention by the regulator, especially because the issuers were not providing ‘actual price bands’. The change will now allow investors multiple price points at which they can bid for shares in the IPO.

From April 1, 2022, half of the anchor investors in the IPO will be locked in for a period of 90 days, while the remaining 50% will be locked in for 30 days. Considering the discretionary allocation available to anchor investors, the procedure and manner of applying different lock-in to them is yet to be seen. It may be intended to keep investors invested in the company for a longer period of time, but this intervention may not serve its purpose if companies are unable to ensure that anchor investors stay put beyond a quarter after the IPO.

SEBI has prescribed a revised allocation methodology for non-institutional investors (i.e. those who invest more than this) 2 lakh in an IPO): One-third of the share of non-institutional investors should be reserved for applicants who invest more than this. 2 lakh but up to 10 lakh for such applicants investing more than Rs. 10 lakhs. Further, allocation to non-institutional investors will be through draw of lots, as is done for retail investors, to ensure transparency in the allocation of IPO shares and to allow adequate allocation to ‘small’ non-institutional investors. for.

Apart from the IPO, the Preferential Issue Rules have also seen a set of amendments. These issues can now be taken for consideration other than cash. The pricing of preferential issues has changed significantly. Keeping in view the growth of the Indian stock market, (i) for frequently traded securities, we have a short period for determination of the minimum value, i.e., volume-weighted 90 or 10 trading days prior to the relevant date. higher than the average price, or any such strict requirement set forth by an issuer in its Articles of Association; and (ii) for low-traded securities, it should be based on an independent valuation.

In order to ensure that this is not a contravention in cases where a preferential issue results in an allotment of more than 5% of the issuer’s shares or a change of control and no control premium is involved in the pricing, SEBI has mandated that, in such cases, a valuation report from an independent registered valuer would be required. In addition, if the preferential allotment results in a change of control, a committee of independent directors would be required to provide an appropriate recommendation on all aspects of the preferential issuance, including its cost – which would be disclosed to the public. should go.

Like IPO, the lock-in period for such issuance has been reduced. In case of preferential allotment to promoters, 20% will remain closed for 18 months and rest for 6 months. Preferential allotment to other shareholders will result in locking of such shares for 6 months. In addition, promoters will be permitted to pledge such locked-in shares subject to certain conditions.

Some of these proposals are primarily a response to several IPOs and preferential allotments that were concluded earlier this year and follow consultation papers issued by SEBI. While some of these changes may have long-term effects on capital-raising plans, the use of funds and the growth of companies, a portion of them can be described as protective.

SEBI could have additionally prescribed more detailed disclosures and criteria for continued monitoring, taking into account existing legal requirements, including the need for shareholder approval for the proposed acquisition. As far as the capital market is concerned, we expect that these changes will not have a substantial impact on the plans of the companies planning to list their shares on the Indian stock exchanges.

Yash J. Ashar and Janhvi Sexaria, respectively, are Partner and Head, Capital Markets; and a partner in Cyril Amarchand Mangaldas