India’s capital markets regulator has proposed to toughen its policy that will limit the quantum of stake dilution by significant shareholders — those with more than 20% stake — in companies that do not have an identifiable promoter and look to go public through initial public offerings.
In a consultation paper floated by the Securities and Exchange Board of India (SEBI), the regulator has proposed that shareholders may not be able to sell more than half their pre-IPO stake. The policy includes venture capital funds (VCFs), category II alternative investment funds (AIFs) comprising private equity investors as well as foreign venture capital investors.
“It is proposed that divestment of stake by significant shareholders be capped at say 50% of their pre-issue holding for draft offer documents,” stated the SEBI paper, which also proposed more policy revisions for primary markets.
“Further, for such significant shareholders who are selling through OFS (offer for sale) in IPO, their remaining post-issue shareholding can be locked in for a period of six months from the date of allotment in IPO,” SEBI said. This rule may also be applicable even if significant shareholders are VC funds, AIFs in Category I and Category II, and foreign venture capital investors.
SEBI has sought public comments by the end of November 2021 on the need to cap the stake divestment limit of significant shareholders selling shares through the secondary component in an IPO.
SEBI also proposed to introduce a maximum of 35% combined limit (including a 25% fund allocation for general corporate purposes) for companies looking to deploy the fresh IPO proceeds towards unidentified inorganic growth initiatives that include future acquisitions.
The regulator expressed its concerns that such a practice may lead to uncertainty and ambiguity. In other words, it may dilute a company’s real objective for going public as it observed that many companies, especially new-age technology companies, floating IPO proposals that did not disclose the sum reserved for future mergers and acquisitions (M&A) without identifying them.
SEBI clarified that such limits may not be applicable if a company identified a target company for an acquisition, and disclosed the objects in its IPO proposal.
The IPO market has garnered significant attention this year. More than five dozen companies have already gone public in the record year and have mobilised $10 billion through IPOs.
SEBI has also proposed a longer lock-in for anchor investors in a partial manner to provide more confidence to other investors participating in a public offer.
At present, SEBI regulations have a 30-day lock-in for anchor investors from the allotment date. It is now proposing that at least half the shares being allotted in the anchor book be allotted to investors who agree to remain locked-in for at least 90 days.