SEBI introduces new rules for IPOs

The regulator tightens nitty-gritty to reduce volatility and uncertainty

Amid the IPO frenzy, the stock market regulator - Security Exchange Board of India (SEBI) has come up with some changes in the rules for IPO and its preferential share allotment. For more instances, it has tightened rules for promoters & anchor investors and also, relaxed some of the rules. There are many small changes but in the article, we will look at some of the major changes.   

In the broad sense, SEBI has introduced changes in spending of funds raised through IPO along with changes to the preferential allotment.  

Changes in spending cap:  

• According to SEBI, companies can now spend a maximum of 35 per cent of the total amount raised through IPO on future inorganic growth and general corporate purposes.  
• Companies can use only 25 per cent of the IPO proceeds for unidentified acquisitions. In short, SEBI has come up with rules that would allow investors to know more specifically where their money will be invested.  
• Credit rating agencies can now act as monitoring agencies for the utilisation of money raised in the IPO.  

Changes in the preferential allotment:  

• For promoters, who hold more than 20 per cent stake in the company, can now sell up to 50 per cent of their stake on the listing of the IPO. This rule can be soothing for retail investors. Earlier, the promoters could offload all of their shares in the open market, causing a lot of volatility. With this rule, SEBI can curb the volatility to some extent.   
• As another measure to reduce uncertainty, SEBI has increased the lock-in period for anchor investors, which basically includes institutional investors. Earlier, the lock-in period was 30 days, after which, they could sell 100 per cent of their stake. Now, they can sell only 50 per cent of their stake after 30 days and the remaining portion can be sold after 90 days.   
• It has also mandated that the price bandgap should not exceed 5 per cent.