New SEBI rules on IPOs should have meaningful impact on market action

The Securities and Exchange Board of India’s (SEBI) new IPO rules are in focus with Campus Activewear becoming the first company to issue its public offer, after these rules came into effect recently.

The regulations should have a meaningful impact on IPO market action.

First, Non-Banking Financial Companies (NBFCs) can no longer fund an individual over Rs 1 crore for IPO financing. This is likely to bring down the massive subscription numbers under the HNI category and it will also ensure more stable, long term money into IPOs.

Regarding the second change — categorization of the HNI segment — SEBI has said that one-third of the shares under the this category will have to be allotted to smaller HNIs with an application size of Rs 2 lakh to Rs 10 lakh. The remaining two-third will be allotted to large HNIs, with the application size of over Rs 10 lakh.

Similar to the retail category, the draw-of-lots concept will also be applicable to the HNI category. This could ensure a fair allotment of shares to all applicants.

The third change is around offer for sale under IPOs. SEBI has said that shareholders with more than 20 percent of the pre-issue holding can only offer half of the holding under the OFS of any IPO. Shaving less than 20 percent of the pre-issue capital can sell up to 10 percent under the IPO’s OFS category.

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This will discourage IPOs that have a sole purpose of giving investors an exit. This will also encourage companies to raise more growth capital in absence of a large OFS element.

SEBI has also said that anchor investors getting allotment will only be allowed to sell half of their stake post 30 days of listing. They will have to hold on to the balance 50 percent stake for 90 days.

In IPOs, where the issuer hasn't identified the inorganic target, the issuer will only be allowed to raise 25 percent of the issue size towards the objective of inorganic growth. Also, these issuers will only be allowed to raise 35 percent of the total size towards general corporate purpose. This can ensure better disclosure regarding how these companies want to use the funds that they raise.

All in all, these new rules from SEBI will lower the frenzy temperature around IPOs till recently, while also ensuring more transparency for investors and responsibility for the issuers and shareholders wanting an exit out of these companies.

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