Capital Markets

Despite the ongoing pandemic, fuelled in part by the outbreak of the Omicron strain, the stock market continued to surge in the previous quarter with sustained investment in public offerings. To further encourage and facilitate fundraising, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 were amended.

Richa ChoudharyPartner

Avanti KaleSenior Associate

Pooja SharmaSenior Associate

In the last quarter, the bourses saw the debut of various technology companies and unicorns. Given this upward trend and tailwinds for fundraising through Initial Public Offerings (IPOs), the market regulator Securities and Exchange Board of India (SEBI) notified amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Amendments 2022) on 14 January 2022. These amendments relating to the manner of utilisation of funds, offer for sale, lock-in period, etc., are aimed at further protecting the interests of investors and re-jigging fundraising norms. Key developments under the ICDR Amendments 2022 are discussed below.

Key Developments

  • Utilisation of funds

    The ICDR Amendments 2022 introduce stricter norms for the utilisation of funds, especially in cases where the object of the offering is to fund future inorganic growth by way of acquisitions or investment targets that the issuer company has not yet identified. The amendments cap the fund usage earmarked for such objects to 25% of the amount being raised by the issuer. This change was prompted in light of various unicorn/technology-led IPOs such as Zomato and PayTM, referring to unidentified targets as part of their objects of the offering.

    In the event of an unidentified acquisition, funds earmarked for such objects and general corporate purpose (GCP), have been capped at 35% of the total amount being raised (with a limit of 25% for the deployment of the amount towards an unidentified acquisition). GCP is the portion of the issue proceeds which the issuer has the flexibility to deploy without ascribing a specific purpose.

    Previously, the monitoring agency registered with SEBI monitored the utilisation of funds. Under ICDR Amendments 2022, credit rating agencies (CRAs) registered with SEBI monitor the utilisation of funds. The CRAs must now monitor the utilisation of the GCP amount (previously not monitored). This is to be disclosed in a report to be placed before the issuer's audit committee for consideration on an annual basis. Further, the monitoring agency must monitor 100% of the issue proceeds (previously 95%).

    This has been done to protect public investment in public offerings, particularly of new-age technology companies with uncertain and ambiguous objects, where the deployment of funds raised is solely at the issuer's discretion.

  • Offer for Sale

    The number of shares that can be offered for sale by existing significant shareholders of the company in public offerings made by loss-making companies under Regulation 6(2) of the SEBI ICDR Regulations, has been restricted to:

    • 50% of the pre-issue shareholding where such existing selling shareholders, individually or with persons acting in concert, hold more than 20% of the pre-issue shareholding of the issuer; and
    • 10% of the pre-issue shareholding, where such selling shareholders, individually or with persons acting in concert, hold less than 20% of the pre-issue shareholding of the issuer.

    These restrictions primarily target companies with significant shareholders and no identifiable promoter. They have been introduced in an effort to prevent significant shareholders, i.e., shareholders holding more than 10%/20% of the pre-issue shareholding of a company, from divesting their entire investment in the company since a complete exit by significant shareholders would not inspire confidence among investors, especially in loss-making companies.

  • Lock-in Period

    The lock-in period for shares allotted to anchor investors in public offerings has been increased from 30 days to 90 days for 50% of the shares allotted to them from the date of allotment. The remaining 50% of the shares shall be locked-in for 30 days from the date of allotment. The increase in lock-in period has primarily been introduced to inspire confidence in other investors, with anchor investors committing to longer holding periods up front. This should also contribute to price stability.

  • Other notable changes

    • An additional eligibility criterion for undertaking an IPO has been introduced. The issuer, its promoters and directors should not have been identified as ‘fraudulent borrowers’ under the RBI guidelines.
    • For book-built issues, the cap of the price band will now be at least 105% of the floor price (earlier 120%).
    • The allocation in the non-institutional investor category (NIIs) has been revised as follows:
      • 1/3rd of the portion available to NIIs will be reserved for applicants with an application size of more than INR 2,00,000 and up to INR 10,00,000;
      • 1/3rd of the portion available to NIIs will be reserved for applicants with an application size of more than INR 10,00,000.

While the ICDR Amendments 2022 attempt to put investor protection at the forefront, they have curtailed the freedom afforded to companies and their existing shareholders as a consequence, especially in the case of deployment of funds and exit opportunities. Considering many IPOs are expected to launch in the current year, it will be interesting to see how these measures affect the ongoing IPO surge.

SEBI also examined the disclosure of non-traditional key performance indicators (KPIs) in IPO documents and their impact upon the valuation of issuers in its consultation paper Disclosures for ‘Basis of Issue Price’ section in offer document under SEBI ICDR Regulations, 2018 issued on 18 February 2022 (Consultation Paper). This follows the recent spurt in filings for IPOs by new-age technology companies who do not meet the eligibility criteria of maintaining a three-year track record of operating profit, thereby falling within the purview of the other eligibility bucket as per SEBI ICDR Regulations. Currently, the SEBI ICDR Regulations require disclosure of traditional parameters in the IPO documents such as price to earnings ratio, earnings per share, return on net worth and net asset value. The Consultation Paper proposes additional disclosure requirements about the ‘material KPIs’ otherwise shared by the companies with their pre–IPO investors at any time during the three years before the IPO. These include a comparison of KPIs and financial ratios over the preceding three years and interim period, along with an explanation and comparison of KPIs with Indian listed peer companies and/or global listed peer companies (wherever available). This is expected to be finalised in the coming months and will likely overhaul the current disclosures around pricing and the valuation analysis for these IPOs.

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