In its board meeting held on 28th December, the board of SEBI made some key statutory changes to IPO and mutual fund regulations with far reaching implications. With the IPO market collecting over Rs1.31 trillion in the year 2021, it was time for SEBI to take a serious re-look at some of the key aspects of the primary market regulation.
SEBI revamps IPO regulation in a big way
The timing was perfect. Indian issuers had raised Rs1.31 trillion via IPOs in 2021. But, more importantly, it is estimated that year 2022 could see more than Rs2.20 trillion getting raised via IPOs, including the formidable LIC IPO. Here are some of the key changes that SEBI announced in IPO regulation in its 28-December board meet.
a) There has been a tendency in many digital IPOs to set out the purpose of the IPO as undertaking inorganic expansion (M&A). Such statements are too ambiguous and need to be more pointed. SEBI has stipulated that in cases where the acquisition target is not identified, the allocation to inorganic expansion cannot be more than 25% of fresh issue size. Also, the allocation to inorganic expansion and general corporate purposes put together cannot exceed 35% of fresh issue size. This will force issuers to be more specific about fund utilization plans.
b) There are some restrictions put on the number of shares that can be offered in offer for sale (OFS), especially where the issuer has no track record. In such cases, selling shareholders holding more than 20% cannot offer more than 50% of pre-issue holdings. In case of holdings less than 20%, they cannot offer more than 10% of pre-issue holdings. This will ensure skin-in-the-game for early investors.
c) In a significant shift, the utilization of the funds will not be monitored by the Banks/Financial institutions, but by credit rating agencies. Also, such CRAs will monitor the use of funds raised for general corporate purposes and report to the Audit committee quarterly till the funds are 100% utilized.
d) SEBI has also stipulated that the floor price for preferential issue in case of frequently traded stocks shall be higher of the 90 days and 10-days VWAP price. However, for infrequently traded stocks, a valuation report will be mandatory. In addition, the valuation report will also be mandatory if the preferential allotment results in change in control of more than 5% post preferential issue. In case of 5% or more change in control, a committee of independent directors will also be required to provide a recommendation on control premium with adequate justification.
e) Currently, anchor investors have mandatory lock-in period of 30 days from the listing date. However, this has resulted in heightened volatility, around the end of the anchor lock-in. This has been more pronounced in digital stocks. SEBI has recommended that while 50% of anchor allotment will have a 30-day lock-in, the balance 50% will be locked in for 90 days, effective from April 2022.
f) To reduce the impact of large applications, SEBI has changed the allotment process for HNI/NII investors. Out of the 15% NII allocation, one-third will be reserved for applications in the Rs2 lakhs to Rs10 lakhs category. Only two-thirds will be available for the above Rs10 lakhs category. In addition, the allotment for the NII category will be done by draw of lots (like retail segment) and not on discretionary basis as is done now.
g) SEBI has also accepted the recommendations on revised lock-in for promoters in preferential issues. Currently, for promoters, the lock in period in preferential issues is 3 years up to 20% of post-issue capital and 1 year for above 20% post-issue capital. Now these two lock-in periods stand reduced to 18-months and 6-months respectively. For non-promoters, the lock-in period stands reduced from 1 year to 6 months. In addition, SEBI has allowed pledging of preferential allotments under lock-in if part of the clause of lending institutions.
h) Finally, on the subject of price band, SEBI has stipulated that the minimum price band must be at least 105% of the floor price.
To sum it up, the IPO segment has seen significant changes announced by SEBI to prepare the primary markets for the surge of IPOs in 2022.
Key amendments to Mutual Fund regulations
After the Templeton MF episode in April 2020, there have been concerns about funds being shut down summarily. Here is what SEBI has proposed in this light.