Sebi Board OKs Changes to IPOs, Preferential Issues Minimum Price Band

The board of the securities and Exchanges Board of India (Sebi) approved crucial changes to initial public offering (IPOs). These include restricting the amount that a company can use for unidentified acquisitions, increasing the lock-in period for anchor investors and approving credit rating agencies (CRAs) for monitoring issue proceeds.

The regulator’s board also approved tighter rules on the appointment of person who had failed to get elected as directors, introduction of special situations funds to invest in stressed assets and revised settlement regulations. ET reported December 27 that the Sebi board would be approving a series of changes aimed at primary market reform.

ET had reported that Sebi was considering special situation funds on December 15.

If a company says in the offer document that it plans inorganic growth but has not identified any investments target, then the amount for this and general corporate purpose (GCP) should not exceed 35% of the total amount being raised. However, there will be no limits if the proposed acquisition is identified and specific disclosures about this are made in the offer documents. The regulator also restricted the number of shares that can be offered by stakeholders.

In an offer sale, equity offered by shareholder holding more than a 20% stake, individually or with persons acting in concert, should not exceed half their pre issue shareholding.

Lawyers said these changes are a response to several IPOs by new-age technology companies earlier this year. “Inability to raise money for future identifiable acquisitions would impact capital-raising plans of some unicorns, particularly, where such companies may not have any other use of capital and where existing shareholders are not keen to sell,” said Yash Asher, partner and head, capital markets, Cyril Amarchand Mangaldas. “Large amount of flexibility to use funds is a hall mark of those listing their equity shares on international stock exchanges and investors vote with their feet when they are not happy with use of such funds, including any new acquisition which they don’t like.”

These changes could have long-term impact, he said, adding that the regulator could have prescribed additional, detailed continuous disclosures and monitoring, keeping in mind existing requirements, including shareholder approval for proposed acquisitions. These changes may impact the plans of companies planning to list on Indian stock exchanges, he said.

Anchor investor lock-in periods will increase for half the holding.

The existing lock-in of 30 days will continue for 50% of the portion allocated to them. It will be 90 days from the date of allotment for the rest for all issues opening on or after April 1,2022.

The Sebi board also approved a proposal to divide the non-institutional investors category, under which high net worth investor apply for IPOs into two. A third of the allocations ranging from Rs2 lakh to Rs10 lakh. Two third will be reserved for applications above Rs 10 lakh from HNIs. Also, shares to rich investors will be allocated on a draw of lots as is currently done for retail investors.

The Sebi board also approved the introduction of a minimum price band in all public issues, where the upper price should be at least 5% more than the floor price.

It also approved the proposal to mandate trustees of mutual funds to obtain the consent of unit’s holders when the majority of trustees decide to wind up a scheme, the move follows Franklin Templeton Mutual Fund’s decision last April to wind up six of its schemes. Following this, unit holders were forced to move court to challenge the legality of the decision.

PREFERENTIAL ISSUE

The Sebi board has also approved sweeping changes to rules related to preferential share offers by relaxing pricing norms and lock-in requirements for promoters.

It has also proposed a shorter look-back period for pricing of preferential shares to 90 or 10 trading days, whichever is higher, from the current 26 weeks or two weeks.

It also said companies must obtain a valuation report, whenever there is a change in control following a preferential allotment of shares to investors. The move follows the controversy over the PNB Housing Finance-Carlyle deal.

Besides, independent directors would be required to provide a reasoned recommendation on all aspects of the preferential issuance, including to 18 months from the current three years.

SPECIAL SITUATION FUNDS

The Sebi board also approved a special category of venture capital funds to buy stressed loans from banks and financial institutions.

“The special situation funds in the AIF (Alternative Investments Funds) category is a welcome addition to the arsenal of weapons to tackle stressed assets,” said Suhail Nathani, managing partner, Economic Laws Practice. “The framework as envisaged seems to offer the right amount of flexibility through which accredited investors and HNIs can participate in the opportunity that stressed assets can unlock for those who are willing to invest in this asset class.”

The special situation funds would have a minimum corpus of Rs 100 crore, accept investments of not less than Rs 10 crore from accredited investors. They have also been exempted from investments concentration norms in a single investee company. There would also be no restriction on investing their investible funds in unlisted or listed securities of the investee company.

“Currently AIFs can only invest in securities and hence carving out a separate AIF sub-category for special situation funds, which will then be permitted to purchase distressed loan books, will open up a new asset class for global investors and also increase liquidity in the system,” said Tejesh Chitlangi, senior partner, IC Universal Legal.

The regulator said appointment or a reappointment of any person, including as managing director or whole-time director, who had previously been rejected by shareholders should be done only with the prior approval of the latter.

It has reduced the time period for filing a settlement application to 60 days, from the current 180 days, after receipt of the show-cause notice. It has also rationalized the settlement amount and the time given to submit revised settlement terms to 15 days from the current 20 days.

“The experience shown redundancy of figures being arrived at by applying the formulae provided in the settlement Regulations,” said Sumit Agrawal, founder, Registered Law Advisor and a former Sebi official.

“On one hand, settlement by Sebi is considered without considering the merits of the matter, on the other, Sebi now seeks to provide facts and circumstances of the matter as a factor to arrive at settlement terms. The details of the notification are awaited to allay this ambiguity.” S-ET

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