The number of companies coming for IPOs has increased with more than 90 companies getting listed since Jan’21. In the calendar year 2021 (CY2021), 63 companies raised nearly 1.20 lakh crore through IPO.
While the trend for CY2022 is much subdued on the back of the macro-economic and geo-political issues, but still 31 companies were collectively able to raise nearly 55K crore through IPOs.
Many new-age startups such as Zomato, Nykaa, Policy Bazar, etc. had a bumper listing. But investors have burned their fingers because of the steep correction in the stock prices of these companies.
SEBI has made some amendments regarding the IPO issue to safeguard investors while enabling new companies to access the public markets.
Amendments for the fresh issue and OFS
A company can raise capital from the public for several reasons. But the broad categories are a fresh issue and offer for sale. The fresh issue is done to raise capital for inorganic growth activities, general corporate purposes, debt repayment, etc.
An offer for sale (OFS) is done to give an exit in part or full to the existing shareholders of the company. According to the new amendments, for the fresh issue, a company can raise only 25% of the issue size for inorganic growth funding if the inorganic growth target company is not identified.
Only 35% of the issue size can be raised towards general corporate purposes. Before the amendments, the company did not have to specify how the raised funds were earmarked for inorganic growth or general corporate purposes.
In the case of OFS, before the amendments, there was no restriction on the sale of shares by existing shareholders.
But after the amendments, the existing shareholder with more than 20% shareholding can sell only up to 50% of its shareholding through OFS and if the shareholding is less than 20%, then the shareholder can sell only up to 10%.
Lock-in for anchor investors
Concerning anchor investors, from April 1, 2022, the anchor investor will have 30 days lock-in period for 50% of the holdings and the rest 50% will have a lock-in period of 90 days as compared to the earlier 30 days lock-in period on 100% of the holding.
This ensures that anchor investors have skin in the game for a relatively long term and that they don’t invest only for the initial pop in the stock price.
Changes in subscription norms for non-institutional investors
SEBI has also changed the subscription norms for the non-institutional (HNI) category. NBFC can no longer fund more than ?1 crore towards IPO financing.
Further one-third of the shares for the non-institutional category is reserved for application sizes ranging between 2 and 10 lakh.
Rest two-thirds is reserved for applications above the size of 10 lakh. The table below shows the significant fall in the HNI subscriptions in the IPOs in 2022 as compared to 2021.
Amendment regarding price band
Earlier, companies were free to set the price band. But this led to the price band being too narrow as it was beneficial for companies to get the issue price near their desired level.
So, SEBI has mandated that the upper price band must be at least 105% of the lower price band. This ensures that the IPO is priced more realistically.
Disclosure of key performance indicators and past fundraising
SEBI has mandated that the companies must disclose key performance indicators. They are also now mandated to disclose the pricing of the shares based on past fundraising through private equity investors before the IPO.
They must share the price information basis the secondary sales and acquisitions during the last 18 months. If there are no transactions in the past 18 months, then the price per share based on the last five primary and secondary transactions not older than three years from the IPO date must be disclosed.
The disclosure must be done on Weighed Average Cost of Acquisition basis. This ensures that there is no exorbitant difference in offer price during the IPO vis-à-vis the price of shares just before the IPO.
Confidential pre-filing with SEBI for IPO
In the US and Canada, technology companies such as Uber, Airbnb, Snap, etc., have used the confidential filing route before their IPOs.
Confidential filing allows the company to file draft documents with the regulator without publicising any business information. This helps to withhold sensitive information that might be of use to the competitor, especially for high-growth firms.
In the US, if such a company decides to go public, it must file publicly only three weeks in advance compared to a few months through the traditional route.
In India, companies have to file the DRHP and the approvals take anywhere from 30-70 days. SEBI is expected to issue guidelines on confidential IPO pre-filling. Tata Play the DTH platform is expected to be the first Indian company to file confidential pre-filling of offer documents.
The new amendments from the SEBI are a welcome step towards ensuring that retail investors are safeguarded. The amendments reduce information asymmetry and help investors make informed decisions. It also ensures that the funds raised through the IPO route are used for the said purpose and reduces speculation from the institutional and HNI investors.