At its final board meeting of the year, the Securities and Exchange Board of India (Sebi) will expand IPO price ranges, extend lead investor foreclosure periods, and cap the amount a Majority investor can sell during a stock sale, two people familiar with the matter said.
The changes are based on a November 16 discussion paper and will aim to curb extreme volatility on listing day or when major investors pull out, the people named above said on condition of anonymity.
At an event on Wednesday, Sebi chairman Ajay Tyagi highlighted the additional regulatory challenges posed by what he called “companies with non-traditional business models.”
Currently, shareholders can sell all or part of their stake through an offer to sell (OFS) as part of an IPO. But in the case of new-age companies, many of which lack an identifiable sponsor and experience constant losses, a total exit from large shareholders could erode investor confidence.
Sebi will require investors with more than 20% of the capital to be able to sell a maximum of 50% of their shares through the OFS, said one of the two people mentioned above; the rest can only be sold six months after registration.
Sebi also plans to tighten up information on the IPO’s proceeds.
In his November discussion paper, Sebi observed that many new-age companies cite âfunding of inorganic growth initiativesâ as one of the reasons for fundraising.
âRaising funds for an unidentified acquisition creates some uncertainty / ambiguity in the purposes of the IPO,â Sebi said.
Now companies will only be able to use 35% of IPO proceeds for such growth initiatives, the second of the two people named above said.
In any public offering, the presence of institutional investors and the continued presence of anchor investors inspire confidence in the broader market.
But when key investors pull out as soon as the mandatory 30-day lock-in period ends, it results in stock volatility.
Shares of food delivery leader Zomato fell 8.8% as lead investors left their stake after the month-long lockdown.
Shares of One97 Communications, the parent company of Paytm, plunged 13% on December 15 following the withdrawal of flagship investors.
Even FSN E-Commerce Ventures Ltd, which operates beauty startup Nykaa, fluctuated between an intraday gain of 4.4% and a loss of 5.91% after the lockdown of key investors ended.
The regulator will now extend the blocking period to 90 days, the second person said, because he believes this will stabilize the share price and prevent losses for retail investors.
Inspired by the failed deal between PNB Housing Finance Ltd and Carlyle Group, Sebi also plans to change a company’s stock valuation standards in the event of a change of control.
In June of this year, PNB Housing announced its intention to issue preferred shares and warrants to Carlyle Group, as part of a ??4,000 crore equity fund infusion led by existing investor Carlyle, which would also result in the transfer of control.
This was to be done without an independent valuation from PNB Housing Finance, which was in line with Sebi standards, although the company’s Articles of Association (AoA) mandated an independent valuation.
The deal ran into problems as a group of investors insisted on valuing the shares. Eventually, the sale was canceled.
Listed entities will now have to adhere to AoA and Sebi standards. In addition, if a company allocates more than 5% of shares to an entity, a valuation report must be provided.
Sebi will also change the price band standards. In the future, the difference between the floor price and the top price will be at least 5%. Sebi recently observed that the price range offered by companies is extremely narrow.
“A narrow price bracket provides an opportunity for an issuing company to camouflage a fixed-price issue into a pound-built issue,” the first person said.
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