Sebi proposes tightening rules for IPO proceeds utilisation

Mumbai: The Securities and Exchange Board of India (Sebi) proposed a limit on the money raised from initial public offerings (IPOs) that startups can use for mergers and acquisitions (M&As), unless takeover targets are explicitly identified beforehand.

“Raising funds for unidentified acquisitions leads to some amount of ambiguity in the IPO objects,” Sebi said in a discussion paper on Tuesday. The regulator has sought comments by stakeholders to the proposals by November 30. The paper comes in the wake of blockbuster IPOs from startups such as Zomato, Paytm and Nykaa. The Rs 18,300 crore Paytm IPO was India’s biggest ever.

“It is proposed to prescribe a combined limit of up to 35 per cent of the fresh issue size for deployment on such objects of inorganic growth initiatives and GCP (general corporate purpose), where the intended acquisition / strategic investment is unidentified in the objects of the offer,” said the Sebi paper.

Most offer documents cite acquisition plans without naming likely targets. Sebi noted that many startups, unlike traditional manufacturing companies, are asset-light and do not require funds for fixed assets and capital expenditure. Their growth comes from acquiring new customers and technologies.

“Acquisitions by the new-age technology companies are going to be an increasing trend and it is important for them to have ready cash to move swiftly in line with the market conditions,” said Ausang Shukla, managing director and co-head, investment banking, Ambit. “A cap on this may limit their options to make such acquisitions in tougher market conditions, which may be the ideal time to make such acquisitions.”

Sebi rules require an issuer to state the objects of an IPO in the offer document.

“Public market investors will evaluate the ability and track record of the management teams to make acquisitions before subscribing,” Shukla said. “Also, the requirement of monitoring of GCP (general corporate purpose) and specific M&A initiatives would keep appropriate checks and balances for companies.”

Sebi said a limit would not apply if the proposed acquisition has been identified and specific disclosures about such investments were made in the offer document.

The paper also proposed an increase in the lock-in for anchor investors in startup IPOs to 90 days from the current 30 days. Sebi is of the view that this will provide more confidence to other investors.

Investment bankers said many startups opt for IPOs primarily to give liquidity to early-stage investors.

“Most shareholders have inter-se arrangements for managing the timing and amount of OFS (offer for sale),” Shukla of Ambit said. “Bringing in incremental restrictions on this may instead disincentivise the larger investors from considering IPOs and complicate shareholders arrangements.”

The regulator’s expert advisory committee was of the view that instead of increasing the lock-in period for all anchor investors, not less than 50 per cent of the anchor book should be given to those investors who may be agreeable to 90 days or longer, according to the paper.

Currently, companies can allocate 60 per cent of the portion meant for qualified institutional buyers (QIBs) to anchor investors on a discretionary basis, out of which one-third is reserved for mutual funds.

The allotment to anchor investors is made a day prior to the issue opening date.

The regulator has also proposed that issue proceeds under GCP be monitored. The utilisation of the GCP amount by the issuer company may need to be disclosed in the quarterly monitoring agency report.

Currently, companies are not required to disclose any specific object regarding deployment of the GCP amount and its usage is not covered in the monitoring agency report.

“Given the large size of IPOs, there is a need to provide adequate information about the utilisation and monitoring of such a large portion of issue proceeds, earmarked under GCP,” Sebi said.

The regulator has also proposed that in the IPOs of companies where there are no identifiable promoters, divestment of stakes by significant shareholders (holding more than 20 per cent) be capped at 50 per cent of their pre-issue holding.

Also, for such significant shareholders, including private equity funds, which are selling through OFS in the IPO, their remaining post-issue shareholding is locked in for a period of six months from the date of allotment in IPO, Sebi said.

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