Mumbai: The Securities and Exchange Board of India (Sebi) is set to revamp initial public offering (IPO) norms to make them less onerous for legitimate sellers while clamping down on possible misuse.
These include recognising a wider set of institutional investors such as alternative investment funds (AIFs) as counting toward promoters contribution in startups, requiring financial disclosures for three years rather than five and reducing disclosure of the price band to two days before the issue opens from five now.
The board will meet on June 21 to discuss proposed changes in the Issue of Capital and Disclosure Requirements (ICDR), said a person aware of the matter. Regulations have also been rewritten to make them consistent and easier to follow.
“There are cases of good companies where the promoter capital is not adequate for lock-in in an IPO,” said Prime Database managing director Prithvi Haldea. “Sometimes, alternative investment funds are willing to subscribe to the shortfall in the capital and prepared for a lock-in. Hence, its important to recognise a wider set of institutional investors to contribute towards promoters contribution.”
Haldea headed the ICDR committee that was constituted last year by Sebi. The committee has proposed several changes on financial disclosures and related party transactions. This is aimed at rationalising disclosures for group companies based on them being material to such transactions.
Also proposed is an offer document summary that will contain key information about the company upfront.
Companies will be required to provide full details on related party transactions in consolidated financial statements so that investors have clear information about these.
Sebi is set to take a big leap in the right direction, said senior chartered accountant Dolphy DSouza, making IPOs easy and convenient for bonafide issuers, while at the same time keeping an eye out for egregious related party transactions.
“Related party transactions are required to be disclosed on an uneliminated basis, so that investors understand the full scale of” such deals, he said. “The requirement to provide standalone financial statements on the website is aligned to the requirements of company law and do not create any additional burden on companies.”
The committee wants the price band to be announced only two working days before the IPO starts to minimise the effect of market volatility. It has also proposed restricting the subscription of high net worth individuals (HNIs) to the maximum non-qualified institutional buyer portion. The rules currently allow HNIs to make an application for the full book size and some recent IPOs saw over-subscription by this investor segment. In an IPO, 50% of the book size is reserved for qualified institutional buyers, 15% for non-institutional investors and 35% for retail investors.
“Given the huge applications in the past in the NII (non-institutional investor) category primarily for listing day gains, application size has now been restricted to the size of the offer that is available to allocation to NII category and not the full offer size,” Haldea said.
The proposed ICDR regulations have comprehensive chapters dedicated to issuance types. Within each chapter, the regulations are aligned to the process flow to make following them easier.
Obsolete regulations have been scrapped while several have been amended to bring them in line with the current market structure. Besides, all circulars, informal guidance and FAQs (frequently asked questions) have been suitably incorporated.
Over the past few years, the capital market has seen many changes not only on the regulatory front but also in the structure and size of the Indian capital market. This meant that the regulations had become unwieldy, said a member of the committee.