08 Jan SEBI’s new norms for the process of IPOs : Lets understand with examples (GS 3, Economics, The Hindu, Indian Express, Financial Express)

SEBI’s new norms for the process of IPOs- Today Current Affairs

News/Context : Recently the regulator of stock market, Securities and Exchange Board of India (SEBI) has announced the tighter rules for unlisted companies raising capital from the market (Retail investors/institutional investors/anchor investors/preferential investor) through the  issuance of IPOs ( Initial Public Offerings). 

• As per the new rule the minimum Price band will be at least 105% of the floor price.

• SEBI has tightened norms for the sale of share via OFS.  

• Shareholders who own more than 20% pre-issue cannot sell more than 50%. Those holding less than 20% pre-issue cannot offer more than 10% under OFS. 

• The lock-in period is also increased from existing 30 days to 90 days for 50% of the portion of the pre issue shares. The existing 30 days lock in period shall continue for the 50% of the portion.

All these  technicalities can be understood with examples : Supposedly a private limited company wants more capital which it can raise from the market through issuing Initial Public Offerings.  Initial Public Offerings are new shares which are issued to  the market /public. These can be bought by Individual Investors (also called as retail investors) or Institutional Investors (which are mostly banks, companies or Financial Institutions).   After issuing IPOs, the company gets listed in any stock exchange and becomes a public limited company.  It means that the company’s shares are held with public or market people. In this process companies raise funds from the market and it will be said that the company went public.  

But before issuing IPOs , companies issue Pre-IPOs (or generally said as Pre Issue). The  investors which buy the pre issue of a company, are called as anchor investors. They are generally big Companies or Financial Institutions or NBFCs. The Hindu Analysis.

SEBI Requires that there should be a minimum price band  of 105% of the floor price. (The price band is a range of price within which investors can bid). 

After issuing a pre-issue (shares) the company issues IPOs  in the market to the public (retail investors and institutional investors can buy). And then the trading of the share (shares hold by public or say IPOs) of the company in the market on the platform of a stock exchange, starts.  

During this trading Anchor investors who acquired pre-issue shares can also become interested in selling their shares, if they don’t want to retain their  shares (This is called as offer-for-sale (OFS).  If the anchor investors sell their shares on the very first day of the trading (after issuing IPOs), the share value of the  companies on the first day of trading could fall like anything. To stop this sudden fall there is a concept of lock-in period, where anchor investors can sell their shares (pre issue shares through OFS) only after the completion of the lock in period. SEBI has increased the lock-in period  for 50% of the pre issue share from 30 days to 90 days and for 50% of the pre issue share, it is still 30 days. Here SEBI simply wants that these larger investors like anchor investors should invest in the shares of the  newly listed companies for a longer number of days. 

As per the new rule the minimum Price band will be at least 105% of the floor price. Sebi simply has ensured that the minimum gap in the offer price band be such that the cap price is at least 105% of the floor price. This, again, is an interesting intervention by the regulator, particularly because issuers were not providing a ‘real price band’. The change will now allow investors to have multiple price points at which they may bid for shares in an IPO.

SEBI has also put restrictions on the utilization of  funds raised through IPOs, If the details of the utilization are not disclosed in the offer document. Now onwards credit rating agencies registered with SEBI( rather than scheduled commercial banks and public Financial Institutions) will monitor the utilization of  funds raised through IP use by the company. The utilization report is required to be submitted before the audit committee every quarter rather than annually. 

The new norms of the SEBI on public issuance is basically designed to keep the large shareholders longer in the company. It will limit the selling of shares by promoters for big shareholders and will minimize the volatility and the share price after listing. The Hindu Analysis.

Strict rules for the utilization of funds  will control the opportunistic use of  funds by the promoters. It  ensures a better checks and balance on the funds raised from the market/public  by the company.

In this article we mention all information about SEBI’s new norms for the process of IPOs Today Current Affairs.

Md Layeeque Azam, Economics Faculty