The Synopsis
In view of the rising number of Initial Public Offerings (IPOs) flooding the public markets, the Securities and Exchange Board of India (SEBI) has produced a consultation paper.
In recent years, the markets have seen three major trends: large-cap IPOs, many technology company listings, and a rise in the number of offers for sale compared to new stocks issues. The SEBI is primarily concerned with concerns that arise as a result of these three tendencies.
Companies will be required to provide more disclosures.
When a business needs more funding, it will issue more stock shares to investors. Companies must describe how the cash will be used in this situation.
Asset-light technology enterprises, on the other hand, do not need funding for typical capital expenditures such as the construction of factories, showrooms, or other traditional capital expenditures. Instead, these organisations put their money towards things like client acquisition, brand promotion, expanding into new areas, acquiring companies, and developing new technologies.
These businesses have lately resorted to the booming stock markets to obtain funds while enabling current investors to sell their holdings.
As a consequence, a growing number of businesses are categorising the usage of cash received through new issues as "Funding Inorganic Growth Initiatives." The word is quite broad, including a wide range of possible activities such as future acquisitions, strategic investments, new company ventures, and so on.
As a consequence, the regulator is attempting to compel corporations to reveal more information in order to decrease the uncertainty around the concerns. The move is critical since the General Corporate Purposes (GCP) fund has been allotted 25% of the total cash obtained.
"These uncertainties about the issue's objects grow even more if a significant portion of the fresh issue is earmarked for such unidentified acquisition," the consultation paper said, "especially given that issuer companies already have flexibility to earmark up to 25% of the fresh issue size under GCP, under the existing regulations."
A business financing Rs 100 crore, for example, may designate Rs 25 crore to GCP without identifying the eventual purpose. Furthermore, they have the flexibility to transfer a considerable portion of the monies received under "Funding Inorganic Growth Initiatives" without stating any specifics.
As a result, investors are unsure about how the monies acquired via the IPO will be used. As a result, SEBI has suggested a regulation limiting funds generated under each of these categories to 35% of total new issue funds. The rule does not apply, however, if the purchases, investments, or intentions were mentioned at the time the document was filed.
Are GCPs Getting Too Big?
For money set aside for GCP, SEBI has recommended yet another adjustment. Companies might set aside 25% of the entire cash received for GCPs, as previously stated. However, with many significant IPOs recently completed and more scheduled in the future years, the amount of money devoted to GCP has increased.
"It has been seen that issuer corporations are developing large-scale problems. When a result, as the problem size becomes greater, the GCP amount grows significantly in terms of absolute numbers. Consultation paper on revision of key components of the public issue framework Page 7 of 8 For example, in a Rs 10,000 crore new offer, the Issuer Company may have Rs 2,500 crore designated under GCP," according to the consultation document.
Because substantial amounts of money are being set aside for GCP without any indication of how they would be used, SEBI has proposed a monitoring report.
The fund's use by the listed firm would be monitored by a Monitoring Agency, adding additional openness to the process.
Restrictions on the Offer for Sale
Almost all publicly traded Indian firms have had a promoter who owns, manages, and controls the company in the past. The present generation of firms, on the other hand, has attracted a number of investors, blurring the typically distinct boundaries between promoters, management, and controlling shareholders.
SEBI Chief Ajay Tyagi has already raised the problem, according to a Mint storey.
"The notion of promoters and controlling stockholders is being reconsidered." "There are a rising number of enterprises with no obvious promoters," Tyagi stated at the FICCI Summit.
A non-promoter may sell their full share in the offer-for-sale under present legislation. An investor, on the other hand, must maintain a minimum promoter contribution (MPC) of 20% for the first 18 months after the offering. As a result, the promoters have a one-and-a-half-year contract.
"MPC is primarily intended to provide promoters with a stake in the company in order to instil trust in them when approaching public shareholders to seek new cash," according to the article.
As a consequence, SEBI has suggested a lock-in for the company's major owners. Significant shareholders are those who possess more than 20% of the corporation.
"It is proposed that for draught offer documents filed in terms of Regulation 6(2) of the ICDR Regulations, 2018, divestment of stake by significant shareholders (shareholders holding >20 percent) be capped at say 50 percent of their pre-issue holding for IPOs of companies where there are no identifiable promoters," according to the report. Following the IPO allotment date, the remaining post-issue shares would be locked in for six months.
Lock-Ins for Anchor Investors
SEBI has also suggested guidelines that would allow anchor investors to be locked in for a longer length of time. These are often significant institutions that are given shares prior to the IPO in order to boost investor confidence in the offering. However, SEBI is considering extending the lock-in period for such investors beyond the existing 30 days.
"At the moment, Anchor Investors' shares are locked in for a period of 30 days from the date of allocation. A longer lock-in period for Anchor Investors is thought to give other investors greater confidence. As a result, the length of lock-in for anchor investors may need to be reconsidered," the research concluded.
These suggestions, taken together, seem to be initiatives to make the Indian stock markets more accessible to investors. It is critical to adapt to the changing times as the markets develop and a new breed of firms is listed. Reducing information asymmetry and enacting investor-friendly regulations go a long way toward encouraging public markets.
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