SEBI tightens rules for IPO, changes in OFS rules

Earlier, the SEBI board had approved tightening of rules amid a record IPO frenzy, with 63 companies earning Rs 1.19 lakh crore in 2021.

In order to implement these new norms, SEBI has amended various aspects of the regulatory framework under the ICDR (Issue of Capital and Disclosure Requirements) Regulations.

Under the new offer for sale (OFS) rules, shareholders holding more than 20% stake in the company before the IPO will not be allowed to sell more than 50% of their shares.

At present, large shareholders can sell their entire stake through OFS. But with new-age companies with neither a profit track record nor identifiable promoters, a complete exit by major shareholders can lead to a crisis of confidence among retail investors.

The regulator also tightened disclosure norms on how companies can spend proceeds from public fundraising.

They will now use only 25% of the IPO proceeds for undisclosed acquisitions. For others, the spending limit on acquisition will be 35%. In addition, rating agencies will monitor how the funds are used.

SEBI increased the lock-in period for anchor investors from 30 days to 90 days to prevent stock price volatility and losses for retail investors. This will apply to only 50% of the allocation to anchor investors and will be effective in April.

The regulator observed that the presence of institutional and anchor investors provides confidence to the broader market. But when anchor investors exit as soon as the mandatory lock-in period of 30 days is over, it makes the stock price volatile.

Also, if a company allots more than 5% of the shares to an entity, a valuation report will need to be submitted.

SEBI has also changed the rules of price bands. The difference between the floor price and the upper price band should be at least 5%.

The regulator also observed that the price band offered by the companies was extremely narrow. Currently, large, non-institutional investors have a quota of 15% of the issue size in IPOs.