SEBI proposed new and stricter rules for IPOs

This has been the year of IPOs as over the year Indian companies raised Rs 1.19 trillion from the primary market. The market regulatory body SEBI has come up with new rules around IPOs. Experts believe it was the need of the hour as new-age technology companies were filing draft papers with SEBI to raise funds. Most of these companies had no track record of profitability. Hence, to safeguard retail investors' interest, SEBI has made some changes around the listing of new companies.

What are the changes?

Large shareholders barred from selling their entire stake - Currently, the large shareholders can sell their entire holding through Offer For Sale (OFS). Now, the large shareholders of the companies having more than 20% stake in the company cannot sell their entire holding on the listing day. The maximum they can sell on the listing day is 50% of the total stake. The move is to make sure the confidence among retail investors is intact. SEBI brought about this change to give the company more stability post issue.

Spending from proceeds - The companies can now only use 25% of the IPO proceeds for unidentified acquisitions. For others, the spending on acquisitions will be capped at 35%. Also, rating agencies will continuously monitor how the company is using the funds from the proceeds. It is an excellent move by SEBI to ensure the funds are used as stated in RHP.

Lock-in period for anchor investors - SEBI has increased the lock-in period for anchor investors. At present, the lock-in is 30 days. SEBI has now changed that to 90 days. The change will prevent share-price volatility and losses for retail investors. It will apply to only 50% allocation to anchor investors. The rule will be effective from April. 

The presence of anchor investors is always a positive sign for retail investors. In the recent listing of new-age companies when the anchor investors exited just after the lock-in, the share price tanked. For example, Zomato tanked 8%, and Paytm tanked 13%.

Lock-in for non-promoters - Lock-in period for non-promoter investors in a preferential issue of equity shares will be reduced to six months from 12 months earlier.

Price band norms - Companies give a range of prices for investors to apply for the IPO. The maximum price is known as the upper price band. The lowest price is known as the floor price. As of now, there is no rule to set the difference between the two. Now, the difference between the upper and floor band shall be at least 5%. 

The quota for retail investors - 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. The two-third of the portion available to NIIs will be reserved for applicants with an application size of more than Rs 10 lakh.

More and more startups are expected to come with their IPOs in 2022. The above changes by SEBI are definitely positive moves as these rules will safeguard the interest of retail investors in the coming months.