Decodifying SEBI’s New Tweak Rules Governing IPOs In 2022: Part 2

Shareholders must give permission before hiring or reappointing any individual, including a full-time director, managing director or manager, whose appointment or reappointment was rejected at a shareholder meeting. Furthermore, the regulations governing issuances of dematerialized securities have been amended to allow investors to request multiple share issuances, etc. Investing has never been easier, more convenient, and safer thanks to this move.

3) SEBI (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012

As with Special Situation Funds (SSFs), the funds will only invest in stressed assets like distressed loans for purchase, security receipts issued by asset recovery companies, and security certificates issued by distressed companies. Individual investors will be able to invest Rs. 10 crores in SSFs, while accredited investors will be able to invest Rs. 5 crores.

4) SEBI (MUTUAL FUNDS) REGULATIONS, 1996

The trustees of closed-ended schemes must obtain unit holders’ consent before winding up or redeeming units prematurely. In the event of winding up of the corporation, the voting results must be published within 45 days of the publication of notice of winding up circumstances.

5) SEBI (FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2019

SEBI has approved amending its regulations to empower it to issue unique registration numbers to foreign portfolio investments upon the receipt of the basic information concerning the applicant seeking registration as a foreign portfolio investment. In spite of the fact that SEBI’s amended regulations have been approved to provide better investor protection, disclosure, and monitoring standards, these changes may present some challenges to companies seeking capital via an IPO or preferred stock issue.

ANALYSING NEW RULES OF IPO BY SEBI: BOON OR BANE?

Several large companies are raising funds through IPOs on Indian stock exchanges in 2021. These include Zomato, Paytm, etc. As well, more companies with some big IPOS are present, including life insurance Corporation of India, Mobikwik credit personal limited, Byju’s, etc. Therefore, SEBI is expected to protect the investors in this league, which is why the board amended the relevant rule in late December. Investors and firms need to understand how these amendments to regulations will affect them.

Firstly, a new amendment to SEBI’s regulation on Issue of Capital and Disclosure Requirements 2018 discusses draft red herring prospectuses (DRHP). The board imposed criteria for DRHP objects as well as a public offer of sale in an IPO when a DRHP was filed without the issuer’s stellar record. For companies planning to go public before the amendments, they were not required to show the percentage of funds raised that will go to acquisitions or routine investments. With the amendment, the company seeking a float will have to specify how much of the requested funds will be used for acquisitions and/or regular investments. The general corporate purpose will also be limited from acquiring unspecified targets and amounts in the future under the Amendments. Companies will be a bit more judicious when it comes to the exact amount of money they would like to raise and why.

Existing shareholders of an IPO company were previously not restricted from selling shares. As a result of the amended regulations, existing shareholders owning more than 20% of a pre-issue can no longer offer more than 50% of their shares in an IPO. Pre-issue holders can sell up to 10% of their shares, in contrast to those who own less than 20%. As a result, PE, VC, and other investors will be limited in their exit options. Since most IPOs result from investors wanting to exit the company, it is important to consider whether such a change is truly necessary.

Secondly, the entry of a monitoring agency with the board instead of public financial institutions will impact the inspection system while reporting of issues proceeds in the market quarterly. Earlier, IPO funds were not monitored by rating agencies before the Amendments. IPO proceeds can now be monitored by rating agencies until all the IPO proceeds have been spent. Consequently, companies are less likely to mismanage IPO funds. Several market watchers believe the rule will have little impact on compliance and will merely add to it. The enforcement of this rule is still unclear.

Thirdly, the increment of price band in floor price in accordance with the cases of book built issues will be applicable for all issues. Previously, companies filing for an IPO were free to choose their own price band. A minimum of 105% of the upper price band must exceed the lower price band under the amendment. Increasing retail investor protection may be a result of the amendment, which will allow companies to price their IPOs more realistically and appropriately.

Fourthly, the revised lock-in period portion allocation for anchor investors on and after April 01, 2022, will be a bigger mind game for investors. In light of the change from 30 to 90 days, non-genuine anchor investors will have to think twice about recommending security just for the sake of investing and withdrawing once the lock-in period has expired.

Lastly, reduced lock-in tenure for promoters and non-promoters resulting from a preferential issue will benefit the market. Promoter and non-promoter shareholders can both sell their shares in the company now, resulting in faster exits from the company. It is indeed welcoming news that SEBI has taken steps to protect retail and other investors through these amendments, which will surely help promote the growth of IPOs in India. To ensure compliance with these Amendments, issuer companies will need to be diligent and cautious.

IMPACT OF NEW RULES OF IPO IN THE MARKET OF 2022

The IPO market has been experiencing a flurry of initial public offerings in the previous year and many more are expected in 2022, prompting the watchdog to tighten norms, including limiting the amount of proceeds a company can use for unidentified inorganic growth. Also, a cap will be put on the number of shares that can be offered by shareholders who are selling, as well as an extension of the lock-in period for investors who subscribe for shares. Henceforth, it should be noted that many new-age companies are raising funds or are selling shares to raise cash.

Over the past few years, companies across the world have sold IPOs in record numbers. This year alone, India has raised capital to the tune of over $1.5 trillion through IPOs. When a bull market is in full swing, IPOs both in number and size tends to increase. Investors usually flock to bull markets in which stocks are overvalued due to investor money chasing them, thinking that this will provide them with the funds to grow. There may also be opportunities for many owners of companies to sell their stakes at an attractive price during the IPO boom. In contrast to last year, not nearly as many loss-making companies this year raised funds through their IPOs, such as Zomato, Paytm, etc. Investors who have placed their money into these IPOs may suffer massive losses if the price of these shares falls sharply. According to Paytm, its value has slumped by approximately a third since going public. Promoter exposure is expected to increase under proposed regulations. While the price band rule appears to be designed to counter the trend of companies setting narrow price bands for their issues, it does not appear to be intended to solve that problem. A narrow price band hampers price discovery, according to the SEBI.

While the IPO market is booming, SEBI’s new rules should help protect retail investors despite the booming market. However, a number of companies worry that the new capital raising rules will hinder their ability to raise capital for growth. If companies are not allowed to disclose the purpose or target of IPO fundraising, it could turn out they had no specific purpose for the IPO funding, or they raised money not because they needed it, but only because the market was soaring high and there was a strong demand for IPOs. It may be that this new rule that involves closer scrutiny will cause companies to be more selective about the amount of money they raise and why. No freehand rule on price bands should help companies price their IPOs more realistically and appropriately, as price bands in book building are essential to proper price discovery. In this case, it is however a bit dubious to put restrictions on existing shareholders’ ability to sell shares. In the wake of the stock market boom, early investors who were holding higher valuations have now been forced to accept some risk. Though any setback in the secondary market might make it impossible for these investors to sell their remaining shares, lowering the secondary market’s uncertainty will indirectly contribute to a higher IPO price.

Likewise, Traditionally, many companies have allotted shares to big names to create a positive image and ensure retail and institutional investors enjoyed their IPOs, resulting in anchor investors exiting their investment after 30 days (because they went along with the plan). In particular, non-institutional shareholders who purchased shares during the initial public offering and held on to them were most affected. Therefore, these non-genuine anchor investors may be adversely affected by the limitations SEBI has placed on anchor investors’ share sales, insofar as they might refrain from investing just to back the issue and play along until the lock-in period is completed.

Since business conditions can change rapidly in real life, companies may be less flexible if they are mandated to be particular about how they plan to use IPO proceeds. It is also possible that anchor buyer restrictions can affect market liquidity, as huge investors may feel uncomfortable with the idea of holding their investments for longer than 90 days, and remain steadfastly unwilling to participate in IPOs.

The question of whether SEBI should guide consumers in any way when making investment decisions is also raised by critics. Those investors who stand to lose or gain the most from their investment selections are the greatest potential investors to undertake due diligence on before investing in the initial public offering. These IPOs are priced similarly no matter how firms decide to price them. Since the capital they will gain could be affected, most companies avoid under-pricing or overpricing their points. Slender worth bands may be a useful method to keep valuation uncertainty at bay and keep fundraising from becoming an issue.

CONCLUSION

In an effort to protect investors’ interests, Sebi has proposed tweaking rules regarding initial public offerings so that they are more transparent and accountable. Companies, primarily start-ups, are restricted in how much they can raise for their inorganic growth initiatives as well as being restricted on how much their existing shareholders have the right to sell in an IPO. Additionally, Sebi proposes to extend anchor investor lock-in from 30 to 90 days. IPO proceeds will also be monitored. Many modified regulations will be seen to boost up the Indian stock market.

The proposals have not yet been adopted, but industry players are concerned changes around anchor investors and caps on offer on sale (OFS) may have a negative impact on the Indian capital market. Experts have analysed that India’s economy will grow at a good pace this year, but in light of the country’s growth prospects, they believe that Investors should concentrate their attention on the country’s reform strategy. Market volatility is likely to continue in the days to come with these developments, as well as inflationary and valuation concerns. The risk of new-age IPOs for retail investors is much greater as a result of abnormal valuations and inherent business risks, however, it is doubtful whether these safeguards will mitigate the risk entirely.

Considering that many new-age ventures raising IPO funds already have big war chests raised from private investors, they do not seem to really need the IPO funds to expand or acquire customers. It is not uncommon for applicants to provide vague descriptions of what will be done with proceeds, such as ‘general business purposes’ or ‘inorganic growth initiatives.’ A regulation proposed by SEBI seeks to restrict this practice by capping at 35 per cent the portion of offer proceeds that can be used for unspecified acquisitions or general corporate purposes, and by employing monitoring agencies to oversee them. The acquisition of vast businesses in lines of business makes perfect sense in view of the fact that it has a substantial impact on the very nature of the business and the risk profile, which determines investor participation in initial public offerings. Several new firms are losing money, confounding conventional value measurements, yet investors have noticed the lines that form for reserved anchor parts before launch day.

Furthermore, the proposal allowing private-equity-backed companies to sell only half their shares in an initial public offering regardless of vintage could have a serious negative impact on local listings. Considering SEBI intends to give existing management a stake in the business, it would benefit this goal if controlling shareholders and promoters had a significant influence on management. In order for companies to be listed, sponsors must retain at least 20 per cent of equity stakes, and the shares must be locked in for 18 months. After a thorough analysis of IPOs in 2021, the economists are generally satisfied with every amendment made by SEBI. A streamlined guideline will be provided for companies to use the funds for only earmarked purposes, which will protect the interests of small investors. IPO sizes are likely to reduce in the upcoming years, and valuations will be more realistic. The start-ups planning to list in FY 2022 should reassess their plans because many amendments to the listing process such as pricing, also the performance of the listing will be influenced by the offer for sale limitations and anchor investors. While more IPOs are expected in 2022, the total amount might be at a level similar to or below what was raised in 2021 alone. It is certainly commendable that SEBI aims to bring transparency and improved governance in the stock market in order to benefit investors. On the other hand, some experts believe this will limit an organization’s ability to take advantage of the stock market. It remains to be seen whether this move from SEBI will have a lasting impact on India’s stock market.

Companies, primarily start-ups, are restricted in how much they can raise for their inorganic growth initiatives as well as being restricted on how much their existing shareholders have the right to sell in an IPO. Additionally, Sebi proposes to extend anchor investor lock-in from 30 to 90 days. IPO proceeds will also be monitored. Many modified regulations will be seen to boost up the Indian stock market.

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