India’s markets regulator proposed to tighten rules on how companies can spend cash raised through initial public offerings (IPOs) and how quickly big investors can exit, a move aimed at protecting smaller shareholders seeking to buy into a flurry of listings by New-Age technology firms that is propelling the nation’s equity markets to record highs.

The Securities and Exchange Board of India (Sebi) proposed to limit a maximum 35% of proceeds for acquisitions and unspecified strategic investments, according to a consultation paper published on Tuesday. It also proposed to lock in for longer anchor investors to prevent a quick postlisting exit. 

The proposals from the capital markets watchdog — comments for which are sought by November 30 — come as India is set for a record year for IPOs and follow the central bank’s decision to impose limits on borrowers seeking to buy shares of a new listing. Paytm is due to debut this week after a $2.4bn offering that was the country’s biggest, while others such as beauty start-up Nykaa almost doubled on its first trading day.

The decisions will increase transparency and are “a step in the right direction”, said Sonam Chandwani, managing partner with KS Legal & Associates. She added that they “will undoubtedly weigh on prospective start-ups’ IPOs”.

These are some of the changes proposed by the regulator:

  • As much as 35% of the IPO issue can be used for inorganic growth initiatives and general corporate purpose. Technology companies often need to raise funds for expanding into new markets, acquiring customers or other firms — objectives that are often broadly lumped under the category of ‘Funding of Inorganic Growth’ that create uncertainty for investors, the regulator said.
  • For IPO of firms with no identifiable promoters, a share sale by significant shareholders will be capped at 50% of their pre-issue holding. Any investor holding more than 20% will be deemed a “significant shareholder”. Such shareholders will face a lock-in period of six months after the share sale. This may include venture capital funds, alternate investment funds, Sebi said. Venture capital funds and foreign portfolio investors under current law are permitted to sell and have no lock-in period. The sudden blanket restriction on exit of all kind of investors comes across as bit premature and arbitrary, Gaurav Mistry, associate partner at DSK Legal said.
  • At least 50% of the anchor investors should be those who are willing to stay invested for at least 90 days. This compares with 30 days now.

The proposals from Sebi follow the Reserve Bank of India’s decision last month to cap lending for investments in new listings at 10-million rupees per borrower, effective April 1, 2022.

Bloomberg News. More stories like this are available on bloomberg.com


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