The new norms cap the percentage of funds allocated for the acquisition of unspecified businesses at 25% of the issue size, although it would not apply if the prospectus identifies specific acquisition targets beforehand.
The Securities and Exchange Board of India (Sebi) has tightened the rules for funds usage and lock-in periods following initial public offerings (IPOs) in the booming primary capital market. A record ₹1.2 lakh crore were raised in calendar year 2021. The objective seems to be to step up transparency, track fund allocation and stem price volatility of the newly listed scrips.
The new norms cap the percentage of funds allocated for the acquisition of unspecified businesses at 25% of the issue size, although it would not apply if the prospectus identifies specific acquisition targets beforehand. Also, no more than 35% of the total issue size is to be set aside for future inorganic growth and ‘general corporate purposes‘. It remains to be seen whether the new guidelines will provide the requisite flexibility for startups and others to grow purposefully and fast. For new-age, tech startups, rapid inorganic growth often makes better strategic sense than profitability. In mature markets, the norms provide flexibility and adaptability in usage of post-IPO funds, with full disclosures. Also, it’s mandated that a credit rating agency monitor the capital raised. Due oversight over post-IPO funds by multiple players, including investors, banks and financial institutions, is, indeed, needed.
In an offer for sale (OFS) issue, majority investors – those with at least 20% of the pre-issue stake – can only sell up to 50% of their holding. Extant norms allow that anchor investors sell 50% stake under the current lock-in of 30 days, and the remaining 50% 90 days after the IPO has closed. It’s a bid to tighten the norms, with a preference for more ‘skin in the game‘. The lock-in periods for preferential allotments have been sensibly rationalised.