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SEBI approves measures to reform the IPO market this year -Know why

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Earlier this week, you read the most anticipated IPOs of 2022. The primary market has been buzzing since the beginning of 2021 raising a record more than Rs. 1.18 lakh-crore. While 2020 saw only 31 companies going the IPO route, 2021 had more than 60 companies listed.

This upward trend in IPOs has continued this year. There are several companies lined up notwithstanding the latest COVID-19 variant –Omicron. Of course, the runaway success of these initial public offerings prompted several companies to consider IPOs to raise money for acquisitions, capital expenditure, expansion, and more.

Yet, the massive number of IPOs last year with more in the queue this year meant there were high chances of issues and irregularities. 

Are you wondering what issues could plague the booming IPO market?

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Let’s look at the reasons SEBI decided IPO market reforms were needed

People were concerned about the efficacy of the capital raising process and the several structural weaknesses in the IPO process. Moreover, the investors felt the rules did not protect investor interests enough.

SEBI found several discrepancies when it investigated some IPOs back in 2011. They found that

Many prospectuses did not contain all material and adequate disclosures. But the directors and other signatories had wrongly certified in the Red Herring Prospectus (RHP) stating all the disclosures made in the offer document were true and correct.

The Book Running Lead Managers (BRLMs), companies, and respective directors had not exercised the required level of due diligence.

In some cases, the issuers did not make prompt, true, and fair disclosure of all the material developments taking place between the date of the RHP and the date of allotment of securities through public notices, as required.

What’s more, in some cases, funds the issuers raised had reached a few traders through various layers, and those traders had traded considerably on a listing day. In manipulative patterns that allowed some investors who had subscribed to the IPO to exit.

SEBI put a few checks to ensure these issues did not occur again. Some measures were controlling how capital was raised, the number of times a company could raise money through the securities market, prohibiting BRLM’s and CEO’s of such companies from taking up new assignments or being a part of any new capital issue.

Overtime rules that govern markets must change to reflect the times. Periodical review of the existing regulatory framework and improving various issue-related processes to better the quality of public offerings is required. The increased investor interest in the securities market since COVID-19 struck has prompted SEBI to approve measures to reform the IPO market once again.

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SEBI approved Measures of reform

SEBI’s Primary Market Advisory Committee deliberated on several factors. It included minimum public shareholding revision, IGP framework, book building, and fixed price framework, provision for price bands, and modified framework for the rights issue and preferential issues, and monitoring of IPO proceeds. On 28th December 2021, SEBI approved several changes.

Let’s look at the reform measures approved

Mandatory Disclosure of Acquisitions: Companies filing for IPOs must disclose the companies they intend to acquire using the funds raised from the public offering. The mandatory rule was implemented as several new-age tech companies in their DHRPs said they were raising funds for acquisitions without giving any other details while filing the IPO.

The acquisition disclosure is mandatory to ensure there is little ambiguity in IPO objectives. However, if some companies still choose not to disclose their acquisition targets; then SEBI mandates that not more than 35% of the amount raised can be used for such acquisitions and general corporate purposes.

Ceiling shareholder selling: The securities regulator has limited the number of shares existing shareholders can sell under offer for sale (OFS). This limit applies if the company does not have a track record but intends to file for IPO.

Existing shareholders with over 20% stake before the IPO, can sell only 50% of their shares under OFS. For those with less than a 20% stake, the ceiling is 10%. The rule was put in because of the high percentage of shares under OFS in the recent IPOs of startups.

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Increase in lock-in for anchor investors: SEBI proposed to increase the lock-in period for anchor investors of the IPO to 90 days from the current 30 days. The idea is to offer confidence to other investors.

Proceeds monitoring: SEBI said a credit rating agency must monitor and ensure the companies use the IPO proceeds for the objectives they raised capital for.

The IPO funds monitoring will be for 100% of the amount raised instead of 95% earlier. The monitoring will now extend to funds raised for general corporate purposes, too.

Will these changes bring a change SEBI intends, or will it create a backlash? We will have to wait and see how companies react to the reforms to the IPO market.

What do you think of these reforms? 

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