Explained: What are new SEBI proposals on IPO fundraising, anchor investors?

As India’s primary markets activity reaches unprecedented levels in terms of fundraising, the Securities and Exchange Board of India has proposed certain tweaks to existing regulations related to initial public offerings.

Before proposing these tweaks, the Primary Market Advisory Committee (PMAC) of SEBI had discussed these measures. The capital markets regulator is now seeking public comments on these proposals by the end of November. Here’s a quick look at the proposals.

What is the percentage limit on use of proceeds towards acquisitions?

SEBI has proposed that companies earmark a maximum 35% combined limit (including a 25% fund allocation for general corporate purposes) for companies looking to deploy the proceeds towards unidentified future acquisitions.

The regulator said it lately observed many companies, especially new-age technology companies, proposing their IPOs where an undisclosed sum was reserved for future mergers and acquisitions (M&A) without identifying them.

However, such a practice may lead to uncertainty and ambiguity. In other words, it may dilute the company’s real objective for going public. The regulator views these uncertainties increasing in nature where a major portion of capital in an IPO is utilised in fresh capital raising, it said in a consultation paper.

SEBI clarified that such limits may not be applicable where a company has identified a target company for an acquisition, and the objects are disclosed in IPO proposals.

The regulator says new-age technology companies are mostly asset-light organizations and may not require funds traditionally required by the companies for objectives such as investment for fixed assets or capital expenditure.

“The growth in such businesses comes from expanding into new micro-markets and adding or acquiring new customers, companies, technology etc. Accordingly, for primary issuance i.e. for funds raised through fresh issues, such new-age technology companies disclose objects in their offer documents under such heads as ‘Funding of Inorganic Growth Initiatives’, so as to cater to their needs,” SEBI said.

Is there a need to increase the lock-in period for anchor investors?

The regulator wants to review the duration of the lock-in period for anchor investors. It says that a longer lock-in will provide more confidence to other investors.

SEBI does not wish to introduce a strict lock-in duration. Instead, it has proposed that at least half the shares due for allotment in the anchor book be allotted to investors who agree to remain locked-in for at least 90 days.

At present, SEBI regulations have a 30-day lock-in for anchor investors from the allotment date.

“The concept of anchor investors was introduced to inspire confidence in the issue especially when such investors commit moneys upfront and thus provide an indication of price as well as improve the price discovery during IPO. Other investors may take cue based on the investment decisions of anchor investors,” SEBI said.

Should proceeds earmarked under general corporate purposes be monitored?

SEBI proposed that the issue proceeds earmarked under general corporate purposes may also be brought under monitoring. Further, the utilisation of proceeds towards such corporate initiatives may need to be disclosed in the quarterly monitoring agency report.

Under current regulations, a maximum of 25% of the fresh net proceeds from a public offering can be used for general corporate purposes. Also, there are no clear regulations that require any disclosures relating to deployment of funds earmarked for general corporate purposes.

SEBI said that companies are coming up with issues which are very large in size. With larger issue size, general corporate purpose amount also becomes very substantial. For instance, in a Rs 10,000 crore fresh issue, a company can have Rs 2,500 crore earmarked under general corporate purpose.

“Given the large size of IPOs, there is a need to provide adequate information about the utilisation and monitoring of such a large portion of issue proceeds, earmarked under general corporate purposes,” SEBI said.