Sebi mulls tightening rules for IPO proceeds utilisation

Sebi on Tuesday proposed putting a cap on IPO proceeds earmarked for making future acquisitions without identifying specific targets and monitoring funds reserved for general corporate purposes.

Also, the regulator suggested certain conditions for the offer for sale (OFS) by the significant shareholder and recommended that 50 per cent of the anchor book should be given to those investors who agree with 90 days or longer lock-in.

The suggestion comes amid a slew of new-age technology companies that are filing draft papers with Sebi to raise funds through initial public offerings (IPOs).

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The Securities and Exchange Board of India (Sebi) has sought public comments on the proposal till November 30.

In its consultation paper, Sebi has proposed to prescribe a combined limit of up to 35 per cent of the fresh issue size for deployment on such objects of inorganic growth initiatives and general corporate purpose (GCP), where the intended acquisition / strategic investment is unidentified in the objects of the offer.

However, such limits will not apply if the proposed acquisition or strategic investment object has been identified and suitable specific disclosures are made at the time of filing of the offer document.

It is seen that lately in some of the draft offer documents that new age technology companies are proposing to raise fresh funds for objects being termed as 'funding of inorganic growth initiatives, Sebi said.

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This initiative includes future acquisitions, investing in new business initiatives and strategic partnerships by the company without identifying the target acquisition or specific investments proposed to be deployed out of issue proceeds at the time of filing offer document, it added.

Also, the regulator has proposed that the issue proceeds earmarked under should be brought under monitoring. The utilisation of the GCP amount by the issuer company may need to be disclosed in the quarterly monitoring agency report.

At present rules, the amount for GCP should not exceed 25 per cent of the amount being raised by the issuer and current proceeds raised for GCP are not required to be monitored by the monitoring agency.

The regulator observed that companies are coming up with issues, which are very large in size. Thus, with a larger issue size, the GCP amount also becomes very substantial.

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"Given the large size of IPOs, there is a need to provide adequate information about the utilisation and monitoring of such a large portion of issue proceeds, earmarked under GCP," Sebi noted.

The regulator has proposed that IPOs of companies where there are no identifiable promoters, divestment of stake by significant shareholders (shareholders holding >20 per cent) be capped at 50 per cent of their pre-issue holding.

Further, for such significant shareholders, who are selling through OFS in IPO, their remaining post issue shareholding can be locked-in for six months from the date of allotment in an initial share sale.

This should also be applicable even if significant shareholders are of venture capital fund, category I and category II alternative investment fund (AIF).

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Under rules, issuer companies with promoters are required to maintain Minimum Promoter Contribution (MPC), up to at least 20 per cent of post-issue capital as MPC, which is locked-in for 18 months post listing.

It is meant principally to ensure skin in the game for the promoters to inspire confidence while approaching the public shareholder to raise fresh capital.

However, in the case of IPOs where there is no identifiable promoter, there is no requirement of MPC and lock-in post listing, as there is no promoter.

"There may therefore be a need to bring some parity to inspire confidence amongst the investors by existing shareholders, who are having significant shareholding. This may be specially required for loss-making companies coming with IPO," Sebi noted.

Instead of increasing the lock-in period for all anchor investors from 30 days, it has been suggested that not less than 50 per cent of the anchor book should be given to those anchor investors who may be agreeable with 90 days or longer lock-in period.

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