SEBI proposes stricter IPO norms as startup listings pick up

SEBI proposes stricter IPO norms as startup listings pick up

The Securities and Exchange Board of India (SEBI) has proposed to change the rules governing Initial Public Offerings (IPOs) with an aim to bring in more transparency and accountability. The market regulator is seeking to raise funds for companies, mainly startups, for inorganic growth initiatives as well as take existing shareholders to IPO. Further, SEBI has proposed to increase the lock-in period for anchor investors to 90 days from the present 30 days. It has also called for great monitoring of the proceeds of the IPO.

The offers come amid record collections of over Rs 1 trillion through IPOs this year – a large chunk of it from new-age and loss-making companies.

The regulator issued a consultation paper in this regard on Tuesday. SEBI has sought feedback from the market before the end of this month, after which it will strengthen the rules.

“It has been observed that in some of the recent draft offer documents, the issuing companies are proposing to raise fresh funds for those items, where the object is referred to as ‘funding of inorganic growth initiatives’, including future acquisitions, new Including investments in business initiatives and strategic partnerships.Specific investments proposed by the company to be positioned out of issue proceeds without identifying target acquisitions or IPO objects by raising funds for undisclosed acquisitions, SEBI said in a discussion paper. There is some uncertainty in this.

The recently concluded startup IPOs such as Zomato, PolicyBazaar and Paytm had reported the objects of the issue as funding acquisitions and growth initiatives.

“SEBI wants to limit the end use of the funds raised, if the objective of the IPO proceeds is not specific. It seeks to incentivize fixed end use plans from companies going for IPOs. This will help in better monitoring and help in keeping the investors safe,” said corporate lawyer Supreme Vaskar.

Existing rules already allow companies to raise up to 25 per cent of their IPO proceeds under the vague head ‘General Corporate Purpose (GCP)’.

SEBI has prescribed a combined limit of 35 per cent of the new issue size for Inorganic Development Initiative and GCP deployment on such items. This limit will not apply if companies are more specific about their plans while filing their offer documents.

The regulator has also raised concerns over dilution by existing shareholders in the IPO. It has proposed companies where there are no identifiable promoters, holding more than 20 per cent stake, to sell up to a maximum of half of their pre-IPO holdings. The rest will remain closed for at least six months from the IPO.

SEBI has said that the move is to ensure more skin in the game and instil confidence among investors, especially in the case of loss-making companies.

SEBI has also proposed that at least 50 per cent of the shares allotted in the anchor category remain locked-in for 90 days instead of the current lock-in of 30 days only. “It is felt that longer lock-in for anchor investors will provide greater confidence to other investors,” SEBI said.

The regulator has also proposed that the issue proceeds prescribed under the GCP be brought under surveillance. Every company that raises fresh income in an IPO has to appoint a monitoring agency, the agency’s job is to see whether the funds are used for the purpose stated in the offer document. The GCP component is currently excluded from such monitoring.

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