EXECUTIVE SUMMARY
Following up on proposals made in its consultation papers issued in October and November 2021, and the decision taken by the Securities and Exchange Board of India (SEBI) in its board meeting held on 28 December 2021 to approve several changes in the regulatory framework applicable to initial public offers (IPOs) and certain other categories of public issues as set out in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), SEBI has on 14 January 2021 notified an amendment to the ICDR Regulations to bring these changes into effect.
Among other changes as further described below, the amount of the proceeds received by the issuer in an issue that may be utilised for funding inorganic growth would be capped unless the acquisition target is identified in the offer document with suitable disclosures, and the role of the monitoring agency has been enhanced. For certain categories of IPOs which involve a secondary sale by existing shareholders, limits have been introduced on the extent of participation in the offer for sale by such shareholders.
LIMITS ON UTILISATION OF ISSUE PROCEEDS FOR INORGANIC GROWTH; ENHANCED SCOPE FOR MONITORING OF UTILISATION OF ISSUE PROCEEDS
In its November 2021 consultation paper, SEBI had highlighted a trend of issuers, particularly what it termed ‘new age technology companies’, proposing to raise funds for inorganic growth initiatives including future acquisitions, investing in new business initiatives and strategic partnerships, without identifying the acquisition target in the offer document. SEBI had observed then that this led to uncertainty or ambiguity in the objects of the IPO.
Pursuant to the recent amendment, for IPOs where the objects include funding inorganic growth, unless the acquisition target is identified and suitable disclosures made in the offer document, the amount earmarked for such purposes must not exceed 25% of the funds raised in the IPO and taken together with amounts earmarked for general corporate purposes must not exceed 35% of the funds raised. These limits have been made applicable to IPOs both on the main board and by small and medium enterprises, as well as rights issues and further public offers.
For public issues (including IPOs by small and medium enterprises as well as rights issues and further public offers) where a monitoring agency is required to be appointed, the utilisation of amounts raised for general corporate purposes would now need to be disclosed in the monitoring agency’s report. Further, monitoring would continue until utilisation of 100% of the issue proceeds, instead of 95% as is the current requirement. Monitoring activities would also now need to be carried out by a SEBI registered credit rating agency.
Though SEBI’s press release following its board meeting where the amendments were approved had stated that these changes would be applicable to all IPOs where the draft red herring prospectus is filed with SEBI after notification of the amendment to the ICDR Regulations, the gazette notification provides that these amendments have come into force upon their publication.
PARTICIPATION BY EXISTING SHAREHOLDERS IN OFFER FOR SALE
In its November 2021 consultation paper, SEBI had proposed that where the issuer did not have any identifiable promoters and also did not have a track record and proposed to make an IPO under Regulation 6(2) of the ICDR Regulations (i.e., through compulsory book building and at least 75% allotment to qualified institutional buyers), then any shareholders with more than 20% pre-IPO shareholding would not be permitted to sell more than 50% of their pre-IPO shareholding in the IPO.
Following the latest amendment, a limit has been introduced on sales by existing shareholders in all IPOs under Regulation 6(2) and not only where the issuer has no identifiable promoters. Selling shareholders which individually or together with persons acting in concert hold more than 20% pre-IPO shareholding would not be permitted to sell more than 50% of their pre-IPO shareholding in an IPO, and their post-IPO shareholding would be subject to a 6 month lock-in even if otherwise exempt on account of being a venture capital fund, foreign venture capital investor or category I / category II alternative investment fund. Selling shareholders which individually or together with persons acting in concert hold less than 20% pre-IPO shareholding would not be permitted to sell shares exceeding 10% of the pre-IPO share capital of the issuer, in an IPO. Though SEBI’s press release following its last board meeting had stated that these changes would be applicable to all IPOs where the draft red herring prospectus is filed with SEBI after notification of the amendment to the ICDR Regulations, the gazette notification provides that these amendments have come into force upon their publication.
INCREASED LOCK-IN FOR ANCHOR INVESTORS
Anchor investors are presently subject to a 30 day lock-in on the shares allotted to them in an IPO. For IPOs opening from 1 April 2022 onwards, 50% of the allotment to anchor investors would be subject to a 90 day lock-in whereas the remainder of the allotment to anchor investors would continue to be subject to a 30 day lock-in.
MINIMUM PRICE BAND
In book-built IPOs, the ICDR Regulations require a price band to be announced within which bids would be sought, where the upper end is not more than 20% higher than the lower end. In its October 2021 consultation paper, SEBI noted how the average range between the lower end and upper end of the price band in book-built IPOs had been shrinking over time to less than 2% in recent years, and highlighted a concern that this trend diluted the objective of having a fair and transparent price discovery mechanism while enabling issuers to camouflage a fixed price issue as a book built issue. In order to address this concern, for all book-built IPOs and further public offers opening on or after the notification of the amendments to the ICDR Regulations, the upper end of the price band must be at least 5% higher than the lower end.
REVISION IN THE ALLOCATION METHODOLOGY FOR NON-INSTITUTIONAL INVESTORS
Noting that the present methodology of proportional allocation to non-institutional investors (NIIs) has led to larger NIIs crowding out smaller NIIs in highly oversubscribed IPOs, SEBI has announced that for book-built IPOs and further public offers opening from 1 April 2022 onwards, allotment to NIIs would be by way of draw of lots. Further, within the NII category, one-third of the allocation would be reserved for applications between INR 200,000 and INR 1,000,000 and two-thirds of the allocation would be reserved for applications exceeding INR 1,000,000.