How SEBI's New Rules Will Impact IPOs in 2022

Capital and commodities market regulator SEBI recently announced amendments in some rules pertaining to IPOs, which have ruled the pink paper headlines during this entire year of 2021.

Even as big names like Paytm, Zomato, Nykaa, Policybazaar etc have already wrapped up their IPOs in 2021, the story is far from over.

There are multiple IPOs lined up for 2022 as well, with a strong pipeline of companies, including both new-age technology companies as well as big names, such as LIC, Oyo, Mobikwik, Delhivery, PharmEasy and Byju¡¯s, to name a few, in full swing to roll out IPOs in 2022.

So, how do these recent amendments in IPO rules by SEBI impact the companies and investors? Read on as we cut through the clutter to unfold some of the major rule changes announced by SEBI.

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1.Restrictions upon non-disclosure of fundraising purpose and target

Earlier, companies aiming for IPOs did not have to specify how much of the raised funds would be earmarked for acquisitions, and/or for routine investments.

But now as per new rules, if the company has not identified any acquisition or investment target, the amount for this and the amount for a general corporate purpose (GCP) cannot go beyond 35%of the total amount being raised through IPO. Also, in case the acquisition target is not identified, the amount cannot exceed 25 %of the total amount raised through the IPO.

Impact: As sometimes, companies could turn out to remain vague regarding the usage of IPO funding, and/or were raising money not because they had any specific requirement, but only because the market was soaring high and the demand for IPOs was strong, this new rule involving closer scrutiny may make the companies a bit more judicious towards how much money they want to raise and why.

Also Read: Fastest Growing Indian Startups That Were Quick To Turn Unicorns

2. Involvement of rating agencies to monitor utilization of IPO proceeds

Earlier, rating agencies did not monitor the funds raised through IPOs. But with the new rule by SEBI, rating agencies can monitor the usage of IPO proceeds till 100% of it is utilized.

Impact: This move is likely to prevent companies from misusing IPO funds. But it remains to be seen how this rule is enforced, with some market watchers of the view that this rule will have limited impact and just adds to the compliance layers.

3. No freehand on price band for IPOs

Earlier, companies going for IPO were free to set a price band as they wished.

But with SEBI¡¯s new rule, the upper price band has to be at least 105 % of the lower price band. For instance, if the lower price band is Rs 100, then then the upper price band has to be at least Rs 205.

Impact: As price brands in book building exist to ensure proper price discovery, this rule is expected to ensure that companies price their IPO more realistically and aptly.

Also Read: How Rakesh Jhunjhunwala Gained ?6,000 Crore On A Stock Whose IPO Investors Are Staring At Losses?

4. Restriction on sale of shares by existing shareholders

Previously, there was no limit on the sale of shares by existing shareholders of the company going for IPO.

But with SEBI¡¯s new rule, existing shareholders owning more than 20% of the pre-issue cannot offer more than 50% of their shares in an IPO. Whereas those holding less than 20% of pre-issue cannot sell more than 10% of their shares.

Impact: Early investors, who were holding the advantage of higher valuations due to the booming market, will now be forced to have some skin in the game. Indirectly, this can result in better pricing of the IPO, as any debacle in the secondary market can make it difficult for these investors to sell their remaining stake.

5. Restriction on sale of shares by anchor investors

Earlier, anchor investors (marquee institutional investors who buy substantial shares in the company just before an IPO opens for a subscription) in an IPO had a lock-in period of 30 days from the date of allotment.

But with SEBI¡¯s new rules, anchor investors can sell half of their shares after the lock-in period of 30 days, and the remaining shares can only be sold after 90 days from the date of allotment.

Impact: Like many companies used to allot shares to big named anchor investors with the aim to create a positive image and ensure that their IPOs received good response from retail and other institutional investors, this resulted in anchor investors (who just played along), exiting their investment after 30 days of lock-in. This often hurt the non-institutional investors who had bought shares in the IPO and were still holding them.

So, this rule by SEBI would impact those non-genuine anchor investors, as they will think twice before investing just for the sake of endorsing the issue and playing along until lock-in ends.

Also Read: Flipkart IPO Likely To Come Out Next Year, Says Group CEO Kalyan Krishnamurthy

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