Sebi tightens rules governing utilisation of IPO proceeds; tweaks OFS norms

To give effect to these, Sebi has amended various aspects of the regulatory framework under the ICDR Regulations

Tightening rules for initial public offering (IPO), Sebi has put a cap on the usage of the issue proceeds for unidentified future acquisitions and restricted the number of shares that can be offered by significant shareholders.

Also, the regulator has extended anchor investors' lock-in period to 90 days and now, funds reserved for general corporate purposes will be monitored by credit rating agencies, according to a notification issued on January 14.

Further, Sebi has revised the allocation methodology for non-institutional investors (NIIs).

To give effect to these, Sebi has amended various aspects of the regulatory framework under the ICDR (Issue of Capital and Disclosure Requirements) Regulations.

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

The regulator said that if a company in its offer documents sets out an object for future inorganic growth but has not identified any acquisition or investment target, the amount for such objects and amount for the general corporate purpose (GCP) will not exceed 35 per cent of the total amount being raised.

It is seen that lately, in some of the draft offer documents, new-age technology companies are proposing to raise fresh funds for objects where the object is termed as 'funding of inorganic growth initiatives' without giving details.

"The amount so earmarked for such objects where the issuer company has not identified acquisition or investment target, as mentioned in objects of the issue in the draft offer document... shall not exceed 25 per cent of the amount being raised by the issuer," Sebi said.

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.

Experts believe that the inability to mobilise money for future unidentifiable acquisitions will impact the fundraising plans of some unicorns, particularly where such firms may not have any other use of capital and where existing shareholders are not keen to sell.

In addition, Sebi said the amount raised for general corporate purposes will be brought under monitoring and the utilisation of the same will be disclosed in the monitoring agency report.

The report will be placed before the audit committee for consideration "on a quarterly basis" instead of "on an annual basis".

Credit rating agencies (CRAs) registered with the Sebi will be permitted to act as a monitoring agency instead of scheduled commercial banks and public financial institutions.

Such monitoring will continue till 100 per cent instead of 95 per cent utilisation of the issue proceeds as at present, Sebi said.

The regulator has prescribed certain conditions for offer-for-sale (OFS) to the public in an IPO, where draft papers are filed by an issuer without a track record.

Under this, Sebi said shareholders with more than a 20 per cent stake in the company before the IPO will be allowed to sell up to 50 per cent of their shares in the OFS.

Further, investors with less than a 20 per cent stake in a firm before the initial share-sale will be able to sell only 10 per cent of their shares in the OFS.

With regard to the lock-in period for anchor investors, Sebi said existing lock-in of 30 days will continue for 50 per cent of the portion allocated to anchor investors and for the remaining portion, lock-in of 90 days from the date of allotment will be applicable for all issues opening on or after April 1, 2022.

In case of book-built issues, Sebi said a minimum price band of at least 105 per cent of the floor price will be applicable for all issues opening on or after notification in the official gazette.

For book-built issues opening on or after April 1, 2022, Sebi said one-third of the portion available to NIIs will be reserved for applicants with an application size of more than Rs 2 lakh and up to Rs 10 lakh.

Further, two-thirds of the portion available to NIIs will be reserved for applicants with an application size of more than Rs 10 lakh.

Allotment of securities in the case of NII category will be on 'draw of lots', as is currently applicable for the retail investor category.

The amendment comes after the board of Sebi approved proposals in this regard in its meeting last month.

It came against the backdrop of 63 companies raising a record amount of Rs 1.2 lakh crore through initial share-sales in 2021.

This was way higher than Rs 26,611 crore raised by 15 companies through initial share sales in the entire 2020 and nearly double the previous best of Rs 68,827 crore by 36 companies in 2017.

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