Financial Insights

SEBI tightens IPO rules

Recently, the Securities Exchange Board of India (SEBI) updated its rules relating to Initial Public Offering. 2021 saw several IPOs from major companies like PayTm, Zomato and Nykaa. SEBI has made certain changes in the rules of IPOs, both for company and investors.

Now, companies cannot use more than 35% of the amount raised through IPO for inorganic growth and general corporate purposes. This will force companies to reconsider the amount being raised and be more proactive about their plans.

Earlier, companies were allowed to use the money raised through IPOs to acquire previously undisclosed targets. Now, companies can use only upto 25% of the amount raised through IPO to acquire unidentified targets. This will compel companies to disclose their desired businesses for acquisition and provide transparency to investors.

SEBI has now allowed credit rating agencies to monitor the utilization of IPO funds of companies. This will prevent any misuse of IPO funds and improve transparency.

Promoters who hold more than 20% stake in the company prior to the IPO cannot sell more than 50% of their holding in the company’s IPO. Moreover, promoters holding less than 20% stake in the company cannot sell more than 10% of their holding in the IPO. This measure prevents immediate volatility in the stock as promoters would often unload their entire holding and cause more volatility in the stock.

Under earlier rules, Anchor investors (investors allotted shares in company just before its IPO opens for subscription) had a lock-in period of 30 days from date of allotment i.e. they could not sell their shares before expiry of 30 days from date of allotment. Now, such investors can only sell half of their holdings after 30 days. The remaining half can be sold after a period of 90 days from allotment. This would ensure that anchor investors think twice before investing in the company, instead of investing only to sell it out as soon as they got the chance.

Now, companies cannot set price bands however they see fit. The upper price band must be at least 105% of the lower price band. So, if lower price band has been decided as Rs 1000, the upper price band must be at least Rs 2050. This rule ensures fair and realistic pricing.

The year 2022 is set to have several major IPOs. Many famous companies are set to launch their IPOs such as LIC, Byju’s, Mobikwik, Bajaj energy, PharmEasy and Ola. These new rules will help ensure transparency, track fund allocation and reduce volatility.

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